David Shemano writes: > I didn't ask you for evidence that disproves Austrian theory. I asked for > evidence that proves Keynesian theory. If Austrian theory was proved correct > every time something happened inconsistent with Keynesian theory, we would > all be speaking Austrian. Robert Barro says the evidence is thin: > http://www.hoover.org/news/daily-report/90486. What is he missing?<
As I said before, no evidence can prove any given theory. Rather, a theory can only be "proven" _relative to_ another. The the "proven" theory fits the data better than the other. Of course, any "proof" can only be tentative, since both new evidence (or ways of confronting theories with the data) and new theories (or new variants of old theories) arise. For example, Monetarism seemed better than the old version of US Keynesianism during the 1970s, but then fell from grace in the 1970s and after, becoming merely a historical footnote. IMHO, Barro's not a good macroeconomist. For example, (based on his data) he argues that the Keynesian income/spending multiplier was zero (if not lower) during the height of World War 2. He somehow forgot that the Keynesian multiplier theory does not apply (in real terms) when the economy is at full employment, a situation that clearly prevailed during the height of World War 2. By the way, he started out as a Keynesian (and was initially innovative in that school), but must have had some sort of conversion experience. me: >> The big logical error of Say's "Law" is that in real-world economies, people >> do not simply use money as a means of exchange (as for Say) so that the >> world works _as if_ exchange were barter. Money is also used as an asset, >> so that people can hoard it and can increase their hoards. An excess supply >> of goods (and services) or "unwanted inventory accumulation" that results >> from a recession can thus coexist with an excess demand for money >> (hoarding). In simplistic theory, prices (including interest rates) >> immediately adjust to end both the excess supply of goods and the excess >> demand for money. The problem is that at the same time that prices adjust -- >> and often more quickly -- there is also _quantity adjustment_: the firms >> producing goods see that they have too many inventories and so cut both >> production and employment of labor-power (or cuts wages). This reduces >> national income and spending, which makes the excess supply of goods even >> worse, but it does reduce the excess demand for money (fewer transactions = >> less demand for money). Luckily, the downward spiral of goods demand and >> production doesn't continue forever, as Keynes pointed out.<< > I just took the time to read Book 1, Chapter XV [of J-B Say], and a couple of > things:< hmm... I never thought I'd get into a "what Say (really) said" debate. > 1. Say never says there cannot be a glut. To the contrary, his entire > analysis is trying to explain why gluts occur: "But it may be asked, if this > be so, how does it happen, that there is at times so great a glut of > commodities in the market, and so much difficulty in finding a vent for them? > Why cannot one of these superabundant commodities be exchanged for another?"< The issue with Say (vs. Marx, Keynes, etc.) is not "gluts" in general (i.e., how there can be an excess supply in a specific microeconomic market) but rather general gluts, i.e., how the supply of goods and services for the economy as a whole can exceed the demand for them. It's the latter glut can leads to falls in employment, income, and spending (recessions). > 2. His [Say's] argument is intended as a refutation of the argument that > gluts occur because of a lack of money. Instead gluts occur because of > misallocation of resources/change in preferences: " I answer that the glut > of a particular commodity arises from its having outrun the total demand for > it in one or two ways; either because it has been produced in excessive > abundance, or because the production of other commodities has fallen short. > It is because the production of some commodities has declined, that other > commodities are superabundant. To use a more hackneyed phrase, people have > bought less, because they have made less profit and they have made less > profit for one or two causes; either they have found difficulties in the > employment of their productive means, or these means have themselves been > deficient."< This is familiar to anyone who's studied economics. In the absence of a general glut, the excess supply (glut) in one industry corresponds to an excess demand in others. It's been called Walras' Law, after the economist Léon Walras. ( goo goo g'joob!) The main difference between Walras and Say seems to be that the former allowed for an excess supply or demand for money as an important phenomenon. > 3 Say argues that there can be exogenous causes for a glut: "It is > observable, moreover, that precisely at the same time that one commodity > makes a loss, another commodity is making excessive profit. And, since such > profits must operate as a powerful stimulus to the cultivation of that > particular kind of products, there must needs be some violent means, or some > extraordinary cause, a political or natural convulsion, or the avarice or > ignorance of authority, to perpetuate this scarcity on the one hand, and > consequent glut on the other. No sooner is the cause of this political > disease removed, than the means of production feel a natural impulse towards > the vacant channels, the replenishment of which restores activity to all the > others. One kind of production would seldom outstrip every other, and its > products be disproportionately cheapened, were production left entirely free.< See what I said about point #2. > 4. To the possibility that the glut can be caused by the hoarding of money, > Say responds: "Even when money is obtained with a view to hoard or bury it, > the ultimate object is always to employ it in a purchase of some kind. The > heir of the lucky finder uses it in that way, if the miser do not; for money, > as money, has no other use than to buy with."< That's Say's crucial assumption. He did not know that people (and corporations) often hold money not as a means to purchase some good or service in the future, but instead as a form of insurance. Money can be the safest asset in town, worth holding even if the interest rate is zero or negative.[*] Also, as Keynes pointed out, even if I hold money in order to buy a car (or some other good) at some later date, that in no way sends a signal to the auto manufacturers that they should produce an auto for me so that it will be ready when I and if plan to buy it. So my demand for money does not correspond automatically to a demand for autos. So hoarding reduces the demand for autos (and other goods) _now_ while not increasing the demand for them _later_. Even if firms know that I'll buy some good in the future, that doesn't mean that they know _which_ good I'll buy, so there's no incentive for them to produce for me. > To summarize what I think is the issue presented by the Keynesian obsession > with Say's Law, Say would argue that, since money hoarding is irrational and > a short-term phenomenon, if there is an extended general glut in which people > with resources are strongly preferring money to goods, the reason must be > exogenous [to what?]. Keynesians, on the other hand, believe hoarding can > happen for no good reason -- perhaps a spontaneous lack of animal spirits or > other arational or emotional reasons, and such occurrences are endogenous.< Looking at the Keynesian literature, I see no "obsession" with Say's Law except when Classical economists, "Austrians," etc. propose policies that assume that the economy always has full employment of resources (as in, "let's make people suffer from extended high unemployment, since the free market will eventually solve the problem especially if the market is made more free and pure"). That is, Say's "law" only comes up when others invoke it (often without knowing what they're doing). Keynesians do NOT believe that hoarding "can happen for no good reason." Hoarding -- and the famous "liquidity trap" result endogenously from financial crises.[*] After the 2008-09 financial crisis and recession, for example, we see banks voluntarily holding many more excess reserves than ever before at the same time that corporations are holding a lot of excess funds rather than engaging in real fixed investment. Why? both lending and real investment are extremely risky. Even financial investment is seen as much riskier than back in the bubble years, despite the Fed's efforts. In a true "liquidity trap," banks financiers hoard money because they are afraid to hold other financial or real assets. One major example is when interest rates are very low, there's no place for them to go but up. If financiers fear that interest rates will rise, they fear falling bond prices, i.e., capital losses if bonds are held. Thus, money is preferred.[**] That is, the liquidity trap and hoarding need not be "arational or emotional." However, in the real world, "arational," irrational, and emotional behavior plays a big role, especially among financiers. In the bubble years, these folk believed that there was no place to go but up (especially since Alan the Good would save them). Then when it turns out that their optimism was irrational, they flipped over to irrational fears. These fears had real effects: if AIG, Lehman Brothers, etc. couldn't be trusted to live up to their obligations, then _no-one_ could be trusted. (Only CASH could be trusted!) The US financial system thus froze up, sparking a deep recession, justifying and encouraging the pessimism. > That is why Keynesians are rarely interested in solving a recession by > addressing [what some non-Keynesians see as] the cause of a recession, and > instead try to solve the problem by deceiving economic actors (e.g., lowering > real, but not nominal, wages, etc.).< According to Haberler (who should know), the business cycle theory used by most of the so-called "Austrians" see the "cause" of a recession as being that interest rates were lower than the "natural interest rate" before the recession. The artificial depression of interest rates leads to over-borrowing and over-investment (corresponding to under-consumption). This leads to disproportionality between the sectors producing investment goods and consumption goods, that can only be solved by a long period of adjustment, including allowing interest rates to rise to equal or even exceed the "natural" rate. Recovery is costly, so it seems that "Austrians" believe that when the central bank (and the finance system) messes things up, wage-earners should pay that cost. Even without the standard business-cycle theory sketched above, the faith is that cutting real wages will increase the demand for labor-power, ignoring the fact that it will also decrease the demand for goods and services and even cause what Irving Fisher called a "debt deflation" (as actually happened after 1929). Keynes' original formulation was two-fold. First, fitting with Fisher's point, cutting wages can make aggregate demand worse, not better. Second, he thought that nominal wages were "sticky" (unlikely to fall quickly). He thus advocated causing rising prices, which would lower real wages. This in turn would increase the quantity of labor-power demanded (employment), following Classical theory. This not not involve "deceiving" anyone. Later macroeconomists such as the young Barro denied the Classical view of labor-power demand. If businesses in general can't increase the amount of goods and services that they can sell (because of a "sales constraint" due to low aggregate demand), they won't increase the amount of labor-power they hire as nominal wages fall relative to prices. In any event, as Kalecki pointed out, real-world pricing behavior means that (all else constant) falling nominal wages cause falling prices, so that the real wage stays roughly constant relative to productivity. Instead of waiting for nominal or real wages to fall, some effort to loosen the sales constraint is required, e.g., by increasing government outlays, cutting taxes, and/or lowering interest rates. This also doesn't not involve "deceiving" anyone. I do not know what theory is behind the references to deceit. The usual "deceit" theory of employment is associated with Milton Friedman. Increasing money supply (in his view) causes money wages to rise. Since workers are ignorant of what's happening to prices (they rise too), they perceive real wages to be rising, so they supply more labor-power. Moving along the imaginary demand-for-labor-power curve, employment rises. The MF saw this deceit as being successful only temporarily, since eventually prices do rise so that workers' perceived real wages falls and the supply of labor-power falls. Arguably, this theory works when the economy starts at or above full employment. But it does not work when Say's Law does not apply, i.e., when aggregate demand failure implies a sales constraint on labor-power markets so that the demand for labor-power is below the full-employment level. me: > To my mind, capitalists are always interested in justifications for maintaining high unemployment, since it disciplines labor (keeping wages low and labor-effort high, promoting profits) and protects the purchasing power of their paper assets. (Except for a small minority, they totally lack a macroeconomic perspective.) Of course, to some extent the problem is ignorance, as with those who believe that the current government deficit is a much bigger problem than the deficit in the availability of jobs. ...< > Total fantasy. The notion that there are capitalists interested in > maintaining high employment is ludicrous.< Using such a noun and such an adjective suggests that emotion has taken over. But let's ignore that. In terms of individual economic behavior, businesses hate it when profits are low. Whether profits are low due to wage costs or not, they want to cut wages as much as they can. (On average, wages represent about 2/3 of total business costs.) Having high unemployment helps with this effort, just as it puts the fear of god into the employees so they won't be uppity. If profit rates are low, that discourages businesses from expanding their operations. Thus, whether the fall in the rate of profit is due to wages or not, businesses cut their real fixed investment spending, reducing production and employment, causing unemployment. As Marx pointed out, this behavior preserves high unemployment in almost all eras. Of course, this kind of recession is rare (and I think it's incorrect to interpret Marx's theory as describing a business cycle). Normally, the government and its central bank make sure that unemployment is sufficiently high to preserve profitability. After, all if profitability is too low for a significant time period, that encourages inflation. Or at least that's the way pro-business thinkers such as Alan Greenspan think. On the issue of public policy, most capitalists (who are disproportionately represented in public policy-making, by the way) see inflation as a much more serious problem than unemployment. After all, inflation undermines the real purchasing power of bond holdings whereas the high unemployment only means that the economy is wasting its opportunity to produce more goods and services. Unemployed people, in this view, don't really suffer, since unemployment insurance makes up for the lack of wages. (NOT! but that's another issue.) Some of the unemployed are the capitalists' peers, but those guys are losers. In any event, if the unwashed masses _really_ wanted jobs, they'd take wage cuts and be more willing to kowtow on the job. > It is the progressive left that supports policies that increase labor costs > and encourage unemployment, whether it is minimum wage, unionization, > mandatory health care benefits, unemployment benefits, workplace regulations, > terrible public schools and useless college education that produce > individuals that are unemployable. Each of these policies is designed to > discourage the employment of human beings and substitute machinery, and they > do what they are supposed to do.< I'll let raghu and others deal with that issue. -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante. [*] Treasury bills (short-term government bonds) should be treated as a kind of "money" and even cash. I do so above and will justify this some other time. [**] I am not referring to the "liquidity trap" that results because nominal interest rates cannot fall below (slightly above) zero. Though an accurate theory, that's different from Keynes' theory. [***] here, the interest rates are on medium- and long-term bonds, not short-term ones. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
