Thursday, July 29, 2010

bastardized keynes or keynes the ******? (part of an ongoing series)

OK, I've written too much on this blog lately about Keynes to not respond to this very insightful and compelling post by Mark Silverman over at CognitiveFootprint:

I think both Mark and Ewart (the author of the main article Mark discusses) is not really getting Keynes. I'll accept that Keynes promotes spending over saving, and this is at least partially a question of morality, given the quotes from Keynes that both Mark and the author cites. However, I'm not convinced that this is a good or even relevant critique of Keynes' General Theory (hereafter GT) because it starts from his conclusions and policy proposals instead of addressing the whole premise of his arguments -- the big reasons why he wrote the book.

The essence of my argument is this: you're focusing way too much on Keynes' views of the product market. You detach the notion of "business investment" or "spending" more generally from the labor market. Keynes' whole goal in the GT was to set out to address the problem of unemployment and what we get at the end is a recipe book for implementing full employment.

In chapter 2 of the GT Keynes is quite clear that his is a critique of labor markets. He criticizes the idea that the tradeoff between labor and leisure can adjust freely in a general situation of unemployment where savings does not equal investment, arguing that workers will not accept a fall in money wages in order to produce a market clearing in which full employment (and thus the classical model) will hold. This is the "second classical postulate", the one of which he seeks to break and then examine the theoretical implications of doing so.
But there is a more fundamental objection. The second postulate flows from the idea that the real wages of labour depend on the wage bargains which labour makes with the entrepreneurs. It is admitted, of course, that the bargains are actually made in terms of money, and even that the real wages acceptable to labour are not altogether independent of what the corresponding money-wage happens to be. Nevertheless it is the money-wage thus arrived at which is held to determine the real wage. Thus the classical theory assumes that it is always open to labour to reduce its real wage by accepting a reduction in its money-wage. The postulate that there is a tendency for the real wage to come to equality with the marginal disutility of labour clearly presumes that labour itself is in a position to decide the real wage for which it works, though not the quantity of employment at this wage.

The traditional theory maintains, in short, that the wage bargains between the entrepreneurs and the workers determine the real wage...
There are two main things I want you to notice about this quote. First, observe the overall emphasis on labor. This is not going to be a "theory of spending", no matter how much you want to twist the logic -- this is a theory about the determinants of employment, interest, and money (with a particular emphasis on employment). Second, note the underlying acceptance of the neoclassical model! He's using their terms! This is not meant to displace anything big! Check out all of the book reviews by economists such as Leontief and Keynes' responses -- it is remarkable how easily this can be viewed in the orthodox framework. Of course, as I've argued before, this fact makes the GT no less profound, but I think it's important to understand this in the history of economic thought.

From the premise laid out in chapter 2, we begin to explore his thought process -- his analysis of consumption (brief and not that interesting), of investment and his exploration of the relationship between interest rates and the marginal efficiency of capital (not new!). We get to the discussion of financial markets and expectations, and we begin to approach the core punchlines of the theory -- how investment drives income and how it all relates back to the problem of jobs in the economy. For example, why were corporate profits rising in the mid-1930s when unemployment was not getting much better? We can appreciate these types of stylized facts only once we understand the implications of Keynes' argument for understanding both investment AND labor markets.

This post is already getting quite long and I don't have too much more to say. But, I'd like to take up some of Josh's points regarding tracking this morality view of spending into his other works.

While I already included this quote from "Economic Possibilities" in a previous post I'm posting it again because it identifies very clearly Keynes' fundamental acceptance of the Judaeo-Christian, classical model of the economy:
I feel sure that with a little more experience we shall use the new-found bounty of nature [once we are at the stage of technology at which we can solve the 'economic problem'] quite differently from the way in which the rich use it to-day, and will map out for ourselves a plan of life quite otherwise than theirs. For many ages to come the old Adam will be so strong in us that everybody will need to do some work if he is to be contented.
In other words, Keynes still fundamentally accepts this labor-leisure tradeoff which is at the core of a Judaeo-Christian ethical model of the economy.

I conclude with one more quote on work to show what alternative views ARE out there. As David Spencer notes in a recent paper in Labor History:
People were required to work in order to meet their basic material needs but they also benefited from the challenge and difficulty of work itself. Marx suggested that human beings were drawn to work as a means to realise their 'species being' and he considered the participation in work as the basis for a contented and fulfilled life. ("The 'work as bad' thesis in economics: origins, evolution, and challenges," Labor History Vol. 50, No.1 [Feb. 2009]: pg. 48)
This is clearly not how Keynes sees labor.


  1. I am curious about the assumption made throughout these posts (by Ewart, implicitly by Mark?, and by yourself, I have not read Josh but I him as well) that the judaeo-christian view of morality has a negative view towards spending, a view that spending is immoral.
    I am inclined to read into at least the christian part of this (things like "it is easier for a camel to pass through the eye of a needle than for a rich man to get into heaven", etc.) as being opposed to gluttony and waste as opposed to spending.
    Is not the "immoral" thing to do over-consume rather than spend money.
    Certainly this is the protestant view that contributed to American consumerism. "God" wants us to work hard and make lots of money because we are honoring god by doing our best work. Morality enters in only after the spending takes place.
    My point being that under this interpretation of religious values a Keynesian stimulus, public or private has no morality (positive or negative) without knowing on what the money is being spent.

  2. Sure, I completely accept this point.

    Unlike Mark and Josh, I'm not concerned with what morality says about spending. Because that's NOT KEYNES' POINT. Keynes is concerned with the behavior of labor markets and the determinants of their conditions in a GENERAL SENSE.

    And Keynes' moral views on labor (see the labor/leisure tradeoff) are not that much different from the classical, judaeo-christian-influenced model.

  3. In chapter 2 of the GT Keynes is quite clear that his is a critique of labor markets.

    Sorry, no, this is wrong. Keynes is quite clear that his critique is of financial markets. As Minsky put it, the key components of Keynes' system are "an investment theory of output and a financial theory of investment." Labor doesn't come into it.

    As Keynes says, "Our independent variables are, in the first instance, the propensity to consume [which does not vary independently], the schedule of the marginal efficiency of capital and the rate of interest... Our dependent variables are the volume of employment and the national income." (GT Ch. 18) In other words, he is telling a story about how changes in investment demand, due to unstable expectations in the face of fundamental uncertainty, and changes in the rate of interest due to liquidity preference, determine aggregate activity.

    And he was quite clear that his vision of the aggregate behavior of capitalist economies did not depend on the specific operation of labor markets. That's why he was able to accept a conventional marginal-product determination of wages in the GT, under which real wages and nominal wages move in opposite directions, and replace it just a couple years later with the exact opposite (and much more sensible) view that real wages and nominal wages move together independent of marginal productivity, without the rest of his system being affected.

    Interest rates, on the other hand, are critical. Keynesianism is compatible with pretty much any theory of wage determination, but its dynamics depend absolutely on the behavior of interest rates: "The most stable, and the least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in future, the minimum rate of interest acceptable to the generality of wealth-owners." (GT, ch. 21)

    So why does he spend so much time talking about employment? Partly because unemployment was such a big political problem. But more fundamentally, because he did not believe that it was possible to measure aggregate output. (In this important sense, most of today's "radicals" are more methodologically conservative than Keynes.) "To say that net output to-day is greater, but the price-level lower, than ten years ago or one year ago, is a proposition of a similar character to the statement that Queen Victoria was a better queen but not a happier woman than Queen Elizabeth." He therefore opted to use total employment as a proxy for aggregate output, on the not-unreasonable assumption that the capital stock does not vary much in the short run. (GT, ch. 4)

    Keynes still fundamentally accepts this labor-leisure tradeoff which is at the core of a Judaeo-Christian ethical model of the economy.

    No, he does not. In “My Early Beliefs”, Keynes describes the philosophy of G.E. Moore, which he absorbed at Cambridge and continued to adhere to throughout his life, in which the good life consists, essentially, in the contemplation of beautiful objects. (This is in contrast to Marx, who believed that active creative work was essential to human fulfillment. Like David Spencer, I am on Marx's side here. But it’s irrelevant to the question at hand.) Of course certain material needs have to be met before that good life is possible. But Keynes always insisted that material needs are strictly finite.

    The passages that you think you are disagreeing with are actually saying the same thing you are, that the tradeoff between labor and leisure is the historically specific product of a particular phase of capitalist development. What he's saying is that, because of the cultural deformations imposed during the period when capital was scarce, for some time to come people will be psychologically unable to pursue the good life if they do not also feel themselves to be doing some useful labor. In other words, the subjective cost of labor will be negative -- exactly the opposite of a labor-leisure tradeoff.

  4. (Also - I had to cut it from the comment to get it to fit in the box, but I really appreciate your keeping this conversation going. These are very interesting questions.)

  5. I agree with the Minsky quote, but I also disagree that this is the "right" way of reading Keynes. Choose your flavor of Keynesianism -- Minsky, New Keynesianism, Alvin Hansen's Keyensianism -- they all have particular aspects of Keynes' GT which they want to address. And each theory has something to say which we should take seriously -- I'm not kidding here, from the more labor-oriented New Keynesianism to the Minskyian critique of the financial system there is a reason why all the ideas have gained a lot of attention.

    But when addressing Keynes' overall worldview, we have to accept that we won't get it from any one of these sources. That's the whole point of me titling these pieces "Bastardized Keynes or Keynes the ******?" (6 asterisks for a reason): I wonder whether it is possible that Keynes really wasn't that radical at all, and whether we can find the answer to that question by considering Keynes' underlying points stated explicitly in the GT as well as the immediate academic responses to his works. That's why I appreciate your directly citing the GT for the most part instead of relying on quotations from others.

    (For example of an indicator of Keynes' overall worldview, the two newspaper articles that floated around the blogosphere a few weeks ago detailing the Keynes - Hayek debates had Pigou's signature alongside Keynes'.)

    That's my methodological rant.

    Back to Keynes' views on morality. Thanks very much for reminding me of his discussion of Moore's philosophy. Keynes truly strikes me as the classic "gentleman capitalist". However, it's important to note the limits of this notion.

    Step back for a moment and try to think about how such a society where we can all contemplate beautiful objects might come about. That's what I'm interested in. IF the underlying model is one of conflict, I think we can solve it quite easily given a Marxian model. And we all know how central, then, the alternative model of work is for Marx and how the new society would come about.

    However, for Keynes it's simply a problem of technology. No politics, no conflict of alternative ideas of work. It all evolves naturally once the "economic problem" has been solved... economically.

    While I can see in your first points how you refute my assertion that the GT is very much about employment, well.. first, you don't actually address his argument in chapter 2. Second, I think in many ways we agree on the main ideas. So you say Keynes doesn't talk about employment, but he DOES talk about income. Further, you accept the great amount of linkages made between investment and income/employment, which is really the main point I am arguing here.

    Third, Minsky's model has been criticized for accepting a perfectly adjusting real sector in his analysis of how investment affects aggregate behavior. It's probably too complicated to do both, but the reason I bring that point up is because this is essentially what my critique is of Keynes. In order to make his points, Keynes must accept the neoclassical view of the real sector at its core. And that means all the moral implications of the neoclassical view.

    This is already too long.

    In the end, what I'm saying is this. Let's take Keynes' point seriously that "in a conflict with the working class you will find me on the side of the educated bourgeoisie". Keynes' emphasis on "contemplation of the good life" is indeed a noble undertaking, but the entire underlying basis for his thinking is defined by norms and behaviors embodied in a free market economy (tech growth, labor-leisure tradeoff).

  6. This comment has been removed by the author.

  7. I say something very specific: that nothing important in Keynes' system depends on the dynamics of the labor market, and that the most important departure of the GT from orthodoxy is in its treatment of financial markets. This is the opposite of your assertion that he was making a fundamental critique of labor markets. In fact, the GT had a strictly orthodox treatment of labor markets precisely because nothing in it depended on them.

    Anyway, here's what Keynes actually says in Ch. 2:

    "There are two objections to the second postulate of the classical theory [that wages equal the marginal disutility of labor, i.e. no involuntary unemployment]. The first relates to the actual behaviour of labour. A fall in real wages due to a rise in prices, with money-wages unaltered, does not, as a rule, cause the supply of available labour on offer at the current wage to fall below the amount actually employed prior to the rise of prices....

    "But the other, more fundamental, objection, which we shall develop in the ensuing chapters, flows from our disputing the assumption that the general level of real wages is directly determined by the character of the wage bargain. In assuming that the wage bargain determines the real wage the classical school have slipt in an illicit assumption. For there ... may exist no expedient by which labour as a whole can reduce its real wage to a given figure by making revised money bargains with the entrepreneurs. This will be our contention. We shall endeavour to show that primarily it is certain other forces which determine the general level of real wages." (my emphasis)

    In other words, he is explicitly saying that unemployment does *not* depend on what happens in the labor market. What gave you a different idea?

    the entire underlying basis for his thinking is defined by norms and behaviors embodied in a free market economy (tech growth, labor-leisure tradeoff).

    Again, I disagree. But since it seems to me that simply reading the relevant texts with open eyes is sufficient to see how wrong this is, there's not much point in arguing with it here. I get the feeling, I'm sorry to say, that you're arguing with Keynes the way mainstream guys argue with Marx: by responding to what you expect to see rather than what is actually on the page.

  8. Step back for a moment and try to think about how such a society where we can all contemplate beautiful objects might come about. That's what I'm interested in. IF the underlying model is one of conflict, I think we can solve it quite easily given a Marxian model. And we all know how central, then, the alternative model of work is for Marx and how the new society would come about.

    However, for Keynes it's simply a problem of technology. No politics, no conflict of alternative ideas of work. It all evolves naturally once the "economic problem" has been solved... economically.

    This is all true. As far as the *political* differences between Keynes and Marx go, I don't disagree with you at all.

  9. Mark Silverman left a really interesting comment recently, but apparently it did not get published on my blog for some reason. See it below:

    "It's always interesting to me how academic economists in particular so easily sign on to the labor-leisure trade off. Couldn't they (or many of them) be making more money outside of academia? Doesn't that give them pause for even a single moment when they teach about the labor-leisure trade off?

    A slight digression: readers of this blog will no doubt be aware that the labor theory of value (commonly ascribed to Marx) goes back, at least, to Smith.

    But it is also the case that Smith actually relies on the labor/leisure trade off to justify (his version of) the labor theory of value. (The argument essentially is that commodities trade in proportions the labor time required for their production because such time is actually the cost of production -- it's a cost in terms of opportunity cost, here, the cost of leisure. So the labor theory of value becomes of cost of production theory, where the cost is leisure)

    Now, it is well-known (again, among readers of this blog) that Marx borrowed the LTV as articulated by Smith and Ricardo -- but that he, in some sense, also built on it and refined it. He did seem (in certain passages of the Grundrisse) to reject the labor leisure trade off as articulated by Smith. But, in doing so, he is rejecting Smith's argument for the labor theory of value. And the question I still don't have answered for myself is: What argument does he replace it with? (Especially considering that the LTV is still considered, even in Marxist circles, to be a kind of cost of production theory)

    Obviously I will have to ask this question elsewhere (like on the Marx blog) but it has been troubling me for a long time."