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:

http://cognitivefootprint.blogspot.com/2010/07/moral-culture-of-fiscal-austerity-or.html

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.