an odd shift of perspective

Who would have thought. A random mentioning here of the DeLong-Harvey scuffle a couple years back led me to a discussion of that event by Econospeak, which led me, in turn, to a perspective on Keynes that I hadn't completely understood, but which is shared fervently by my colleague Josh Mason, and which I now appreciate much more.

My beef with Keynes, from day 1, has been with an overemphasis on the technocratic issues, ignoring the political issues that would, it seems to me, arise when the state tried to take over investment. The idea that we could solve the problem of capital scarcity by going this route is certainly powerful, and I would argue that with the appropriate institutional alterations it could be implemented. (For example, if you found some way of democratizing the workplace through a revolution then maybe it would work. Although even in this scenario, I suspect that if you do not abolish markets you will not be able to prevent market power.)

But it turns out that Keynes had a few other ideas up his sleeve, though they aren't discussed in the General Theory and they don't seem present or even implicit in Keynes' model of the economy. What is, then, the source of these ideas? To echo what JW's been screaming at me for ages, Keynes was inspired by philosopher G. E. Moore's discussions of what goes into the "good life". In fact, in a letter he wrote to T.S. Eliot in 1945 Keynes gets quite specific about it (now, why he was corresponding with old Tommy Stearns in the first place is a question that I would like answered, but I don't have easy access to the Collected Works at the moment to find out):

The full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less.

Read the rest of the letter here, it's quite interesting. The policy is a kind of civil disobedience that has been proclaimed by radicals throughout history: in a situation of all-encompassing power, resist by not resisting. If you truly want to "abolish the rentier class", take away its fuel. As you slowly starve the beast, the concept of capital scarcity will slowly but surely evaporate and you have Keynes' utopian vision. In short, this is a fully developed, step-by-step prescription for bringing about massive change in society in a very radical way. Not in a Marxist way, mind you, but an important contribution to a utopia nonetheless.

Now, I've always known that Keynes didn't simply advocate for public control of investment. I knew that he favored strong unions, too. But I've always believed that Keynes was limited because his underlying model of market processes was very conservative. That is: keep the unions, keep the technocratic investment board, but don't forget to also include the bourgeois in power, too. Defend capitalism; just make it a more stable one where the rentiers don't play such a large role in government policy ("yeah right!" I used to exclaim to myself). But I think the policy ideas elucidated above demonstrate quite clearly that Keynes had a different understanding of humanity's goals in mind.

Well, now, it seems that I agree a bit more with my friend Josh on the issue...

keynesian orchestration

[Technically a repost of an earlier article ("Keynes our lord and master"), it is considerably revised in particular regard to how detailed the story is as well as more quotes. Enjoy!]

As a PhD student in economic history, I am always trying to turn my teaching duties into opportunities for uncovering the historical background of concepts economists usually take for granted. Unemployment is a perfect example – it’s one of the most-watched statistics in the news, nearly every economist you talk to will have a different explanation for why we have it, and for a year and a half now the official unemployment rate has been over 9%. So, walking to my macroeconomics class one morning, I started to rethink the entire idea of unemployment through the lens of history. In particular, since his name has been thrown around quite a lot lately, I was interested in uncovering what was the particular historical circumstance of the Keynesian view of unemployment.

As most of us have read or heard about in the news, Keynesian policies revolve around the importance of government spending in stimulating a weak economy. For example, John Maynard Keynes saw the problem of chronic unemployment in the U.S. during the Great Depression as primarily a result of insufficient spending and investment in the economy. His prescription was a demand-centric view of economic stimulus: the government should invest more money in the economy, through either the creation of jobs or the spending of money on goods and services. In either case, government spending puts money directly into people’s pockets. Those people then go out and spend that money, fueling more job growth and funneling more money back into the system. And so on. The process has been termed a “multiplier” process because of its continuously compounding effects on economic activity.

Simply put, I wanted to know the historical circumstances of these views: how social perceptions of employment have changed over time and what it might all mean for understanding these basic Keynesian views of both the causes of unemployment and how we might get around to fixing the problem. I started thinking about how society has viewed and treated the unemployed, past and present. And when I started thinking about the history I realized a few things.

I realized that, at least since feudal times, society has always been concerned with the unemployed in some way or another. I also realized that when viewed in historical context, Keynes' views of how to alleviate unemployment have much stronger implications for the role of state policies than many people realize. This surprising finding is against the more conservative “New Keynesians” such as Greg Mankiw (who admit that there is a very limited set of problems which government spending can solve) as well as some of the more “extreme Keynesians” such as Paul Krugman (who generally have argued in our current downturn for a very large stimulus package, much larger than that which was actually passed in Congress, i.e., the ARRA, in 2009). The ultimate implications of this finding are huge. I will argue that Keynes' program for investment-led stabilization by the government, fueled by a desire to solve the "unemployment problem," are a modern example a feudal state in which the government itself controls investment. In this (twentieth century!) policy, the state becomes the director of investment (through the planned system) in order to maintain as close to full employment as possible.

This article is a sketch of the two-pronged argument made above. The end goal is to arrive at a synthesis of social understandings of unemployment with Keynes' policy proposals for investment-driven stimulus by constructing a powerful continuity between the two concepts.

Our story, interestingly enough, begins in fourteenth century England.

After the Black Death had run its course through England, the nobles passed a law titled “Statute of Laborers” (1351). Reacting to the drastic cut in labor supply and the economic consequences associated with it (e.g., a better position for laborers to bargain for higher wages), the statute intended to save and protect the economy from the destabilizing tendencies of the Plague. The statute required every able-bodied person to work – either for wages, serving under a lord, or serving as an apprentice in some trade. (It was considered a crime if one weren't working.) And since the shortage of laborers meant that the economy really depended on them, the statute did something to curtail the ability of these workers to bargain for ever-higher wages. The statute placed a ceiling on wages and regulated several other terms of the labor contract, regulations enforced by town governments who were allowed to determine "fair values" for wages. This was intended to maintain the viability of the local economy (these fair values were also imposed on bread and other goods at the local market where farmers could sell their surplus).

This statute represents the birth of the modern relationship between the state and unemployment. When the English landed on the shores of the New World, many of their institutions and social practices were carried over, including the Statute of Artificers (passed in 1583, it was the 16^th century revision to the original Statute of Laborers, containing many of the basic features of the original statute). Towns in the middle colonies and New England regulated wages and enforced the assize on bread, people were coerced into work when needed, and town officials took care of their poor by feeding them temporarily and getting them jobs.

The American Revolution changed some of these feudal institutions, but not all of them. Surely a republican society was no place for shackled workers and regulated wages. And some of these institutions did slowly began to fade away, particularly unfree forms of labor in the North, as ideological contradictions developed between the North and South with the growth of slavery.

However, the simple fact that the North was using the South as a baseline for celebrating their free labor institutions should set off some bells and whistles. For example, controls on unemployment in many northeast states stuck pretty well. Overseers of the Poor in towns were still a prevalent part of the local political economy, housing the poor and distributing apprenticeships when needed (and, in some states such as Massachusetts, as compelled by statute). Workhouses, another British-inspired institution, were also quite prevalent in early America.

As we move further into the nineteenth century, and as capitalism develops as the dominant economic system in society, the unemployed take on a role in the ideology of this new system. The case for understanding this transition that I know best is the U.S.: previously, in colonial times and through the antebellum period, the poor were taken care of by the public because of traditional laws and institutions. But two trends in the evolution of capitalism roughly beginning sometime after the Civil War led to fundamental changes in how the unemployed were conceived: the privatization of welfare institutions such as the workhouses mentioned above, and the success and rapid development of industrialization.

Allow me to explain.

In this new world of industrialized capitalism, poor relief took on a new, private character as charity became increasingly supported by agents outside government. And the success of industrialization led to a new ideology of society where the unemployed are seen as “mistakes,” people who had failed to integrate themselves into the new system. (This is not an alien concept – Tea Party arguments against unemployment insurance assert that such policies foster laziness and ineptitude at finding a job, and should therefore be cut back significantly.) For this group of unemployed, the threat of poverty and of being an outcast from the new socioeconomic system was enough incentive to keep all employed – no public programs were needed to get people to work, and if people didn’t work, they were to be corrected for their mistakes. As Alex Keyssar argues in his history of unemployment in the U.S. titled Out of Work, a variety of forces acting on labor markets after the Civil War made unemployment a more acute problem, leading to crime and other social problems. In turn, unemployment itself was considered a crime just like it had been five hundred years ago in England: various tramping laws passed in the 1870s and 1880s saw the poor as having failed the system and who were therefore criminals. Such a contradictory state of policy indeed! The late 1800s and the onset of the “Progressive Era” saw the state having a hand in both punishing the unemployed and (marginally) helping workers out through factory inspections and reform!

Alex Keyssar documents how in the early twentieth century various pamphlets argued that American capitalism needs to be saved from the threats to social stability of joblessness. These pamphlets spelled out movements for an expansive program for state policy in addressing unemployment, including proposals for public employment programs. So there we are, early 20th century, still faced with the problem of trying to cure the issue of unemployment. In several ways, as I noted above, things sound quite familiar from previous eras. Social pressures to eliminate unemployed were bound up in state policies which are strikingly similar to the same regulatory controls placed on the unemployed over 500 years earlier in England. But as we turn to the last part of our story, enter John Maynard Keynes, we see that he added a remarkable twist.

Keynes took a long history of social concerns with the unemployed and coupled it with a precise answer for why unemployment fluctuates; thereby producing both a diagnosis and radical prescription for curing spells of protracted unemployment. The logic of his argument is straightforward and parts of it remind one of the events surrounding our latest financial crisis.

Keynes takes private investment as the primary variable in his story, focusing on how it determines cycles of growth and stagnation in an economy. The problem with investment behavior is that it is highly volatile in a capitalist economy with a developed financial sector. Essentially, the reason for the volatility is that stock markets in capitalist economies promote short-sightedness on the part of its investors: investor behavior on the stock market floor fails to reflect the “genuine expectations of the professional entrepreneur” (151). Instead, investors in the stock market focus on short-run expectations concerning the value of stock prices in a future world that is fundamentally uncertain. Thus, not only does short-run investment fail to meet the needs of a stable, growth-focused economy, but since investment affects cycles in the economy, it has perverse effects on employment. These cycles are certainly not natural. Indeed, Keynes noted in the General Theory that “[d]ay-to-day fluctuations in the profits of existing investments, which are obviously of an ephemeral and non-significant character, tend to have an altogether excessive, and even an absurd, influence on the market” (154).

Thus the diagnosis; what about the prescription? Most Keynesians today, in one form or another, argue that government stimulus is necessary in times of economic distress. Governments should take over some of the responsibility of investment in times of high unemployment because private investors are unwilling to take risks necessary to boost job growth. In this way, governments can act to stabilize the system.

Keynes himself was more explicit: government investment should not be a temporary solution – it should actively control the investment of resources in an economy, because that is the only way we can wrestle investment out of the hands of hot-headed private investors in order to stabilize employment levels and eliminate unemployment. “Our final task,” he tells us in the General Theory, “might be to select those variables which can be deliberately controlled or managed by central authority in the kind of system in which we actually live” (247). And in the final book (VI) of the General Theory titled “Short Notes Suggested by the General Theory” he discusses the variables influencing investment behavior and how they may be controlled in order to bring about full employment. He states his case simply, that investment should be directed by the state: “It is not the ownership of the instruments of production [i.e. tools and machines] which is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary” (378).

In conclusion, Keynes is part of a long tradition of those wishing to solve the “unemployment problem” in society. Many of the solutions involved major government policy at either the local, state, or federal level – this was as true in the 14^th as in the 20^th century. There’s nothing new in that. The novelty of Keynes’ approach was that by tying investment decisions to problems of unemployment, the natural response in terms of the historical circumstances was to make investment a crucial matter of state policy.

This is not Keynes as stimulus check-writer: this is Keynes as state conductor of the orchestra that is the economy. With diagnoses of a 9%+ unemployment rate, Depression-era symptoms, and no end in sight, isn’t it time for a new prescription?

John Maynard Keynes, The General Theory of Employment, Interest, and Money (Harcourt edition, 1964)

Alex Keyssar, Out of Work (Cambridge University Press, 1986)

D.O.K.

It isn't even the long run yet.

This is my last Keynes post ever. Unlike Jay-Z I won't bring him back on a later blog post, even as a "feat.".

I'm sick of writing about him and I'm sick of this love-hate relationship. I'm laying all my opinions of him out here, fully exposed. I'm wrapping up what has truly been an unbelievably numerous and verbose series of posts with him, extending back to what I still think is my best post on him here, on the mathematical appreciation of his methodology in the context of the history of economic thought. Later attempts introduced the nuanced view of him that I've always had, but nothing was ever resolved. That's what I'm doing here: being explicit about all of the suggestions made in earlier posts.

WHY KEYNES WAS AND WAS NOT FUNDAMENTAL TO THE STUDY OF THE REAL ECONOMY

Keynes' theory is significant for how he proposed to solve the unemployment problem -- by the end of the General Theory it is clear that the policy implications are that the state should maintain investment levels as well as decisions to change those levels when it is deemed appropriate. These are seemingly-radical conclusions that are, nevertheless, perfectly supported by his analysis of investment behavior in capital markets. They are stated toward the end of the General Theory.

What these conclusions give rise to is a feudal state, the main job of which is to maintain full employment and direct resources across the economy as it sees fit, in the interests of optimizing total wealth and employment growth. There is nothing in Keynes' model about shifting political control to workers, or other more fundamental ways of changing social relations in the economy. We are primarily concerned with the changing actions of the state. The only other noteworthy change is the minor point that unions would undoubtedly play a more central role in such an economy. Unions would act as representatives for labor in making decisions about wage and employment levels and so on, communicating issues from the ground level similar to how peasants would set up villages on parts of the lord's estate in feudalism. In other words, this is not an active labor movement.

This is the fundamental contribution of Keynes to understanding the macroeconomy: solving the unemployment problem, pushing for full employment, through state control of investment. This policy proposal links the core findings of his investment theory to the real economy (i.e., resource allocation among the factors of production -- labor, capital, land, entrepreneurship). Now, what about all the other parts of Keynes, such as the Keynes mostly everyone talks about? In order to address those points we turn to the practical and then theoretical implications of the General Theory.

PRACTICAL IMPLICATIONS OF KEYNESIAN THEORY - 'WAS NOT' PT. i

As for the stimulus policies I've discussed recently -- they represent the most relevant mainstream perspective on Keynes' system. In order to appreciate this, I take one of the main ideas which economists of the time took away from the General Theory: his theory of labor markets. Consider the following small (but significant, as it was the first) exchange between Leontief and Keynes in the Quarterly Journal of Economics. In Leontief's review of the General Theory, he identifies the homogeneity postulate as the target of Keynes' alternative system. It is formally stated by Leontief as follows.

All supply and demand functions, with prices taken as independent variables and quantity as a dependent one, are homogeneous functions of the zero degree ("The Fundamental Assumption of Mr. Keynes' Monetary Theory of Unemployment," QJE 51: 1 (1936): pg. 193)

In order to gain a sense of this postulate, envision an economy composed of 2 markets: apples and oranges. You have $40 in your pocket. Apples cost $2, oranges cost $4, and so you decide to buy 10 apples and 5 oranges. Now, suppose both prices as well as your income doubles. Then You have $80, apples are $4 and oranges $8. The homogeneity postulate says that you will still buy 10 apples and 5 oranges. Now, what Keynes said -- his critique of the homogeneity postulate -- is that there is at least one market where things don't go this way. Suppose for some reason when the price of apples increases to $4, you only buy 8 instead of 10, even when your income increases and all the market forces are telling you to buy the same amount of each. Something structurally is wrong with that market, and the entire system is now misallocated. For example, you might buy a little more oranges (or something else, if we admit a third market into our economy) with the $8 you have left over after skipping out on two apples.

The same, of course, may be true in the reverse way: if income goes down from $40 to $20 and prices decrease to $1 for an apple and $2 for an orange, you may want 12 apples instead of what the market forces tell you to demand -- i.e., 10. In Keynes' model, he thought such things can happen in the labor market. Say you have two markets now, but one of them is a labor market and the other is apples. Start again with initial income of $40. Your wage is $2, apples are $4. If income declines to $20, wages decline to $1 and apples to $2, Keynes believed that you will want to work more than 10 hours in this scenario. This, of course, would then cause a misallocation in the demand for apples. A decline in your income and all of your wages will not have you wanting the same hours of labor(apples) that you did before -- for whatever reason, you will probably want more hours at that lower wage. Maybe you are trying to maintain a standard of living or maybe the union is supporting a higher wage, or maybe the actual money which caused the price decrease or increase is now a factor determining your wage (for example, maybe there is a misallocation in some other market which is in turn affecting how business respond in the labor market). But the result, of course, is that there is a fundamental misallocation once again.

So of course, it is the labor supply function which interests Keynes the most as an exception to this homogeneity postulate -- nevertheless, the fact that at least one of the functions is non-homogeneous means the whole system explodes, with monetary neutrality completely absent from the system. ("Monetary neutrality" would be what we saw in the first apples-oranges example -- demand for either didn't change when all prices and income doubled or halved.)

Now, recall the point made above: this idea is one of the mainstream's central focus points on the General Theory. It remains to show how to translate this idea into policy. Since labor markets could be an important example of non-homogeneity, it leaves a key problem for policy makers: what determines supply and demand of labor, and the resulting wage rate? Well, whatever determines it, it is clear that the resulting misallocations, described above, could affect essential aspects of the product market as well as other areas of the economy, leading to widespread crisis. Therefore, it makes perfect sense to stimulate the economy with boosting incomes, leading to less of a misallocation of labor, ideally so that the misallocations are minimized. And there you have it: the central mainstream critique (Leontief's, one year after the release of the General Theory) is converted into a fiscal policy tool still debated over today.

But there is one other point I want to bring up, aside from demonstrating one of the key ideas behind the Keynesian model (as presented in the General Theory) and its relationship to policy.

It is clear that while the stimulus policy was first seen in practice in FDR's early policies (pre-General Theory), and while the stimulus has been viewed as Keynesian, contemporary news reports show that Roosevelt's policies were primarily being driven for other reasons. One is the idea of a corporatist welfare state, a philosophy where the government plays a big role in the economy in order to sustain capitalism. Keynes was a corporatist, but not the Keynes most talked about in the literature. Another reason is the political pressure from labor, which was much stronger at that time than it is today. Union policies and strike threats were central to some of the key institutional changes of the Great Depression.

In other words, the stimulus policy as we know it today is more in line with the orthodox critique, and overall understanding, of Keynes' General Theory. The New Deal was of course Keynesian and was influenced by many of his ideas, but I would still maintain that there were other, more pressing political and economic forces which gave rise to New Deal policy.

THEORETICAL IMPLICATIONS OF KEYNESIAN THEORY - 'WAS NOT' PT. II

Let's switch gears a bit to Keynes' inherent conservatism from a theoretical standpoint. This is how Leontief describes the homogeneity postulate:

Let us modify the set-up of the frictionless, lagless and 'homoegeneous' economic system by assuming that one demand or one supply curve of any single household or enterprise is not homogeneous... A discrepancy would arise incompatible with conditions of general equilibrium. This shows that in a frictionless system with at least one or more non-homoegeneous elements, the quantity of money ceases to be a 'neutral' factor. On the contrary, the equilibrium amount of every commodity or service produced or purchased by any household or business unit must be now considered to be a function of this quantity. ("The Fundamental Assumption of Mr. Keynes' Monetary Theory of Unemployment," QJE 51: 1 (1936): pg. 194, emphasis in the original)

For good measure, this is Keynes' reaction:

"Mr. Leontief is right, I think, in the distinction he draws between my attitude and that of the 'orthodox' theory to what he calls the 'homogeneity postulate'." And as for Leontief's call for empirical disproof of this postulate (i.e., the claim that what is at work here is primarily an empirical verification or disproof of an orthodox conclusion), "I should have thought... that there was abundant evidence from experience to contradict this postulate" ("The General Theory of Employment," QJE 1937, pg. 209).

In other words, Keynes is quite explicit that he agrees with Leontief's framing of the issue. There are no big ideological fights to be had here.

Leontief makes the point near the end of this small piece that the assumptions of the classical system are untouched by Keynes (pg. 197) -- the homogeneity postulate is derived from the assumptions, and so really what Keynes is arguing is that the empirical basis for one of the conclusions of the classical model of the real economy is wrong.

And this is what I've been saying about the weakness of Keynes' approach in several recent posts. The fundamental system of Keynes' theory is classical in nature -- forget about morality differences – they don’t exist if you accept the fundamental conclusions of a system. Keynes accepts the basic model but is looking to link investment climate changes to real economy issues. The result for the system? A misallocation of resources. The policy prescription, from Keynes himself near the end of the General Theory? Government control of capital flows.

D.O.K.

trying to explain the current labor market through a historical lens

Compare this to this and this. And thanks to Memoirs of an Economics Student for the links and conversations!

(By the way, I updated my UMass econ bloggers post once again to include Anastasia -- who, judging from recent posts, is finishing this upcoming year and planning on going to grad school.)

To sum up the current links, which I would call highly indicative of general catastrophe in the field of economics: a lot of debate is going around the blogosphere about the fact that job openings seem to keep increasing while at the same time no one is hiring. Combine this with relatively good profit postings from companies and you have the makings of a quite confusing scenario. The latest reports from the Financial Times on global equity markets are also strong.

Interestingly, Greg Mankiw was one of the first in the blogosphere to take up one this topic (though a bit tangentially), on 16 July. In this thought-provoking post he notes the rise in median duration of unemployment and discusses the effects it might have on inflationary pressures. He then says we should expect to see a lot of research on this in the coming years. This is an important part of the story of the labor market: if the predicted effects of a rising median duration of unemployment are inflationary, and what we're seeing now is precisely the opposite (worries of deflation through lower-than-expected core inflation), well...

Inflation has remained low. The price index for personal consumption expenditures appears to have risen at an annual rate of less than 1 percent in the first half of the year. Although overall inflation has fluctuated, partly reflecting changes in energy prices, by a number of measures underlying inflation has trended down over the past two years. The slack in labor and product markets has damped wage and price pressures, and rapid increases in productivity have further reduced producers' unit labor costs. (Ben Bernanke, Semi-Annual Monetary Policy Report to Congress, 21 July 2010)

As an economic historian, of course my first question is: what kind of theories or historical models do we have out there to compare this situation to? Surely Mankiw's post is only tangentially related to the key concern of Krugman and others, but my suspicions are that they aren't considering enough of these tangents in their own stories.

What a weird situation.

Here is the clincher, the money question in my book: to what extent is the experience we're going through now similar to the GD? Is this structural unemployment or a cause for radical Keynesian intervention? (Or both.) I think it's safe to say that monetary policy is not a central policy question at this point, and as several liberals have pointed out, it's likely the stimulus simply was not big enough to boost AD out of the slump.

When asking historical questions (or really, any scientific question), a popular method to employ is to start off by thinking about what your "ideal data set" might look like. If you had all relevant data available to you, how would you make your argument? If I could employ any data set how would I make the argument that what we're experiencing now is very much like the case of the GD?

I'm going to put that question out there, see if anyone has thoughts after reading more about the current situation (as well as dig up my copy Kindleberger and a few other studies of the GD), and post some ideas early next week.

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.

keynes our lord and master

I thought a little more about how I would fit my discussion of the causes and consequences of unemployment into a nice clean argument and framework for students of macroeconomics. In the process I realized how great the beast I had summoned really is. Because it turns out that you need a full appreciation for how investment ties into the economy to really understand the interplay between politics and investment (political conditions influence investment which influence government policies which influence political conditions...). And then to tie it all back to unemployment... I certainly need to think about these ideas some more.

Nevertheless, this blog is making a clean break from tradition with these posts. Normally I've presented ideas which have been long in the making and had a great deal of thought behind them. But I get the feeling that these posts dealing with teaching over the course of the next month are going to be significantly informal, representing works in progress undoubtedly containing a few logical gaps. Hopefully it makes reading them more interesting! And as always, I welcome criticism and comments.

So, here's one of these "crazy" posts, for sure.

This post is related to teaching but it is once again highly experimental. I started to rethink unemployment, focusing simply on the idea of unemployment, how social perceptions of it have changed over time, and what it might all mean for understanding Keynes' views. I started thinking about how society has treated the unemployed, past and present. This thinking led me back to Keyssar's book, which is why I posted a quote from it earlier. And when I started thinking about the history I realized a few things.

First, I realized that society has always been concerned with the unemployed in some way or another to an important degree. Second, Keynes' model has much stronger implications for the role of state policies than almost anyone realizes (including obviously the New Keynesians, but even some of the "truer" Keynesians such as Krugman). The ultimate implications of this thesis are huge. Keynes' program for investment-led stabilization, fueled by a desire to solve the "unemployment problem," are a modern example feudalism in which the state becomes something like a feudal lord and the workers serve the role of peasants. In this (twentieth century!) model, the state becomes the direct appropriator of the profits from investment (through the planned system) in order to maintain as close to full employment as possible.

This post is a sketch of the two-pronged argument made above, which I hope to elaborate on very soon. The end goal is to arrive at a synthesis of unemployment with Keynes' views on investment by constructing some powerful continuities between the two concepts, driven by a history of social concerns for the unemployed.

Our story, interestingly, begins in fourteenth century England.

After the Black Death had pretty much run its course through England, the Statute of Artificers was passed. Reacting to the drastic cut in labor supply and the consequences which come with it (such as a better position for laborers to bargain for higher wages), the statute was meant to do two things. First, keep every able-bodied person working -- either for wages, serving under a lord, or serving as an apprentice in some trade. Actually it was considered a crime if you weren't working. Second, the statute placed a ceiling on wages and regulated several other terms of the labor contract. The statute called for regulation of wages by allowing town governments to determine "fair values" (as they were also doing for food such as bread and other goods at the local market).

For me, this is really the beginning of the modern story of the relationship between the state and unemployment. Why? Because the American colonies were not much different -- settlers imported many institutions from Britain, including the Statute of Artificers (and later, in the 16th century, the Statute of Laborers). Towns regulated wages and enforced the assize on bread, coerced people to work when needed, and took care of their poor through either workhouses or some other local welfare system.

And obviously the Revolution would change some of these feudal institutions, but not all of them. The change was far from a radical shift, contrary to what some histories of the Revolution may suggest. Surely a republican society was indeed no place for shackled workers and regulated wages. And some of these institutions slowly began to fade away, particular.y unfree forms of labor in the North, as the ideological contradictions with the South grew. But the simple fact that the North was comparing their free (I would say, "relatively free) labor markets with the South should set off some bells and whistles. For example, controls on unemployment stuck pretty well. Overseers of the Poor in local towns were still prevalent, housing the poor and handling apprenticeships when needed (and compelled by statute). Workhouses, another British-inspired institutions, were quite prevalent in early America.

Poor relief took on a new, private character as we moved further into the nineteenth century. At the same time (and arguably, as a result), workers increasingly looked toward institutions on the state (and later federal) level for aid, and this included aid for unemployment. As Keyssar argues in Out of Work, a variety of forces acting on labor markets particularly after the Civil War made unemployment a more acute problem, leading to crime and other social problems. In turn, unemployment itself was considered a crime just like it had been five hundred years ago through various tramping laws passed in the 1870s and 1880s. Such a contradictory state of policy, where the state had a hand in both punishing the unemployed and (marginally) helping workers out through workplace investigations and reform!

And then in the early twentieth century we have the pamphlet which is mentioned in the quote from my previous post, setting out an expansive program for state policy in addressing unemployment. So there we are, early 20th century and we are faced with how to solve issues of unemployment. In several ways, as I noted above, things sound quite familiar. But Keynes, I would argue, added a remarkable twist.

However, this post is already too long. The second half (really only two parts I promise) coming soon! But to sum up so far and bring back my main argument:

The Keynesian welfare state, specifically in its state-led investment policies, isn't much different from the landlords of 14th century Britain who kept their serfs bound to the land and working, appropriating any surplus value directly from the workers without markets in between to intervene and reallocate. But just because it's an old institution does not mean it is insignificant or even wrong. But viewing the intersection of unemployment policy and investment theory, we can see the true scale of Keynes' plans.

bastardized keynes or keynes the ******? (continued)

I failed to mention in my previous post that "Economic Possibilities For Our Grandchildren" is included in Stephen Marglin's Social Analysis 72, Economics: A Critical Approach syllabus. It's not an important part of what I'm talking about, but I thought I'd mention it since I'll be drawing on many of the sources in that syllabus for my writings this summer.

I continue my response to this short article by stressing the conclusion made in the previous post: Keynes' work doesn't stray very far from the mainstream view of economic theory. Keynes' grand view of the economy is still very divorced from the tough political issues that need to be addressed if some of the conclusions which Keynes arrives at are to be implemented.

There is another subtle assumption in Keynes' writing here which I turn to now, an assumption which drives at one of the fundamental principles of mainstream theory: people face tradeoffs. Specifically, people face tradeoffs between work and leisure.

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. (368-369)

But this is not a "given," it is a product (as is everything else) of history and culture. First of all, the very use of a Judaeo-Christian biblical concept should set off some bells and whistles. Other religions have different understandings of the role of work in life. The Islamic religion, for example, has a more positive view of work. Buddhism no doubt also has a different view of work (though I don't know enough about it to comment). Second, Marx himself had a very different view of work, and argues that it is only the social system of capitalism which fosters the neoclassical understanding of the modern individual as facing a dilemma of tradeoffs between work and leisure. 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)

Keynes revolutionized the field of economics in methodology, theory, and policy conclusions. But Keynes' understanding of the economy is not radically different from those in the profession he aimed to overthrow. In a sense, it was a trading of places between one set of elites and another. Basic bourgeois understandings of the economy did not change.

That concludes my comments on this article. Within a week or so, I will tie this argument up with an examination of Linder's own analysis of the "Rise and Fall of Keynesianism," from Anti-Samuelson.

bastardized keynes or keynes the ******?

We dive once more into the world of Anti-Mankiw with a brief look at an article Keynes published in his book Essays in Persuasion (1933) titled "Economic Possibilities For Our Grandchildren," written in 1930. What I'm about to write may be controversial given that Keynes is one of the leftist's (most popularly, Nobel Prize winner Paul Krugman's) favorite weapons to use against the standard free market arguments of the Republicans. So this could be seen as an Anti-Krugman just as much as it is an Anti-Mankiw. I'll leave that for you to decide.

But before I begin I'd like to briefly interject a point here. The particular set of ideas I am about to draw out is very precious to leftist thinking (subliminally or otherwise). However, in a recent conversation with fellow grad student Ian Seda (you can see his project over at Los Expatriados) I addressed a key concern that there does not exist a strong rhetorical strategy for getting these ideas about a more critical reading of Keynes "out there". Any comments or help on this would be greatly appreciated, because it is quite hard to package some of these ideas in a less ugly fashion. (More on rhetoric as it applies to these ideas in a few days, when we explore the traditions of capitalist opposition in eighteenth century England.)

At any rate, let's get started.

"Economic Possibilities" was written before Keynes published the book which rocked the field of economics in 1935, the General Theory. In this short essy he argues that the disaster of the stock market crash followed by the catastrophic beginnings of the Great Depression is a sign that we are on the razor's edge between two stages of economic history, arguing that very soon we will be at a point when

the economic problem may be solved, or be at leas within sight of solution, within a hundred years. This means that the economic problem is not -- if we look into the future -- the permanent problem of the human race (366)

It's a quite compelling and beautiful passage! If not for want of some explanations, namely, how the economic problem may also be a political problem. This is my main criticism of this essay. Keynes doesn't recognize that, before the economic problem can be solved, the central political tension in all capitalist societies -- arising from the simple fact that employees do not normally have a say in the production process, nor do they share completely in the profits produced in an economy -- must be resolved. Regardless of whether you see the economy as naturally oppositional or not, it is crucial (and, I would argue, easy!) to see that if the problem of scarcity for all is going to be solved, economic decision making must be fully democratic. And economic decision making will be fully democratic when one group -- such as employers and others whose profit rates outstrip the productivity rates of their workers -- is no longer has control over economic decision making. That is, when private property in the means of production (factories, tools, technology) no longer exists, then everyone can decide about economic distribution, and scarcity will be on the way to being eliminated. This is all in the theoretical realm of possibilities, but the importance of it is brought to light by Keynes' prescriptions.

Don't get me wrong: I wouldn't argue that Keynes was oblivious to the strong relationship between economics and politics in his own time. But what this passage demonstrates is a crucial assumption in Keynes' theoretical understandings of the economy where he doesn't fully draw out the implications of the changes in society that would have to take place if a society were to transition to solving the economic problem.

Next (probably for either later today or tomorrow): we take up Keynes' thoughts in this article of the labor-leisure tradeoff. At that point I'll summarize my criticism and drive the main point: the prevalence of bourgeois ideology in economics regardless of whether you're left, right, or center.

bourgeois ideology?

One of my favorite Keynes quotes, from the General Theory:

It must have been due to a complex of suitabilities in the doctrine to the environment into which [classical economics] was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

how history can influence theory: a little-known angle on keynes' general theory

There is both an uplifting and depressing side to the place Keynes' General Theory has in the history of economic thought. The depressing side is easy to tell: many economists afterward used a "watered down" version of Keynes. The critics of these watered-down versions argue that Keynes' ideas were reduced to overly simplified mathematical concepts or cast against a classical backdrop that did little to change the policy implications or logical conclusions of the Keynesian model past the short run.

The uplifting side is that Keynes' General Theory really was a methodological revolution. While many economists who talk about Keynes like to criticize the second chapter for many things (it's incoherent, not an accurate description of later parts of the book on expectations, etc.) I was really impressed by that chapter when I read it for the first time. I think part of that has to do with my background in math, because he uses a very interesting analogy in that chapter which I can deeply appreciate.

He begins by describing the classical system as based on two fundamental postulates. Calling into question the second of these postulates -- the one concerning whether wage is ever equal to its marginal disutility, or what economic forces may determine it to be so -- he says the goal of the General Theory is to break this second classical postulate, and that this is analogous to the breaking of Euclid's parallel postulate in geometry.

I find this interesting because of the history of the parallel postulate in mathematical thought. From the beginning, Euclid found it the hardest to put in words: indeed, while the parallel postulate is the 5th postulate in his axiomatic system of geometry, it is the longest stated by far and it contains vague references to infinity, something none of the other axioms do. So, the first postulate is "To draw a straight line from any point to any point", etc., until you get to 5:

That, if a straight line falling on two straight lines makes the interior angles on the same side less than two right angles, the two straight lines, if produced indefinitely, meet on that side on which the angles are lessthan the two right angles

The history of the parallel postulate springs from the fact that it was so difficult to put in words and, indeed, so difficult to prove! Euclid himself, offering demonstrations of his other postulates, simply assumed the postulate to be true. Essentially, since Euclid introduced his geometry mathematicians have wondered whether the parallel postulate is independent of the other axioms of Euclid's system. What this means is: can we construct logically consistent geometries that may require the first four postulates, but do not require the parallel postulate? Early arabic mathematics, which mostly concentrated on algebra and trigonometry, was also obsessed with proving the parallel postulate but never did. Later attempts were made by Italian mathematicians, and many others as the 19th century saw the most activity in the field of geometry. (Some of this information comes from Boyer's A History of Mathematics)

The result, however, was not an eventual proof. In fact, in the 19th century several mathematicians developed an entirely new field of gemoetry, appropriately named non-Euclidean geometry, which was based on using the first four postulates and breaking the parallel postulate and seeing the resulting properties of that system. One of the major contributers to this field was Riemann. Riemann is in turn important because Riemannian geometry is the basis for Einstein's theories of space-time (incidentally, also developed in the 30s when Keynes wrote the General Theory!). Einstein developed his theory of general relativity based on the idea that the universe operates on a large scale not according to the principles of Euclidean geometry, but by these non-Euclidean systems which can deal with all the geometric oddities of space.

Drawing this all back to Keynes, what this means is that Keynes saw the breaking of the second classical postulate of economics as similar to the development of a theory of general relativity which revolutionized our understanding of physics. We can debate on whether he actually accomplished this, but certainly the General Theory should be appreciated on a methodological level for its contribution to economic thought. What the implications of truly breaking an axiom of an economic system mean for the state of economic theory is a very exciting thought.

And finally, should appreciate it not because of what "New Keynesians" such as Mankiw have done to Keynes' original theory: that is, reduced it to a few assumptions of sticky factor prices in the short run while maintaining the classical long run assumptions.

keynes through the eyes of his biographers, as told by skidelsky

Skidelsky, who wrote a 3-volume biography of Keynes, summarizes previous biographies here (from marginal revolution):

http://thebrowser.com/books/interviews/skidelsky

What I gained from reading this is that each biography "specializes" in some aspect of Keynes or his thought, so from reading all of them you get a good overall view of what Keynes should be known for (relative to what he is "known" for in modern macroeconomic theory and political science).

Harrod actually knew Keynes, so he is able to discuss Keynes' character where others can only infer.

Davidson emphasizes uncertainty which is central to Keynes' thought. Unfortunately, Keynesian uncertainty was formalized in modern macro as a stochastic process with mathematically simple properties where Keynes viewed it differently. Essentially, according to Keynes, state control of investment is necessary to align the interests of investors (in stock and bond markets, for example, who watch the ups and downs of stock prices and risk on an hourly, sometimes minute-by-minute basis) with managers (who must plan more for the long-term outlook of a company); otherwise short-term interests of investors will create a highly volatile market for investment. Since investment drives jobs which drives income which is a central indicator of the health of an economy, we need to maintain stability of investment behavior.

Minsky provided a very thorough analysis of how Keynes discussed financial institutions (he provided a model of Keynes' argument concerning financial institutions in the General Theory and updated it to include the various "financial innovations" of post-WWII) and also emphasized uncertainty.

Walsh's biography seems most interesting to me. He focuses on Keynes' views on investment and his activity in financial markets. While I'm quite familiar with Keynes' observations and arguments from the General Theory concerning the financial sector, it would be interesting to hear more about his successes and failures, and his own thoughts on financial institutions.

Near the end, Skidelsky speaks a bit more about Keynes' place in the history of economic thought, and the current state of modern macroeconomic theory. Overall, a very interesting article. Enjoy!

whose weapon?

A short piece titled "Weaponized Keynesianism" by Paul Krugman, from his blog:

http://krugman.blogs.nytimes.com/2009/06/24/weaponized-keynesianism/

I'm unsure how relevant the term "weaponized Keynesianism" is to analysis of current politics in Washington. Both the right and the left equally take part in cutting up Keynes' General Theory and other writings into the part that fits its ideology. Keynes wrote the General Theory under the explicit premise (made throughout the book, two examples of which I believe can be found in Chapter 12 on long run expectations and also Chapter 22 on Trade Cycles) that private investment was inherently volatile to the point that full state control of capital is required to regulate the business cycle in a socially optimal manner. However, few Democrats in Congress argued for nationalization of banks. What we got instead was the stimulus package, TARP, TARP 2, and PPIP, the last one in particular being the "big policy move" that essentially creates a partnership, a "middle path" between private investors and the government in order to get credit markets back to the status quo (apparently under the assumption that the status quo is desirable).

If we want to talk about "weaponized Keynesianism", then let's talk about what has been weaponized ever since the General Theory appeared in print (see, e.g., Leontief's review of the book in the Nov. 1936 QJE): reframing a radical theory in the most conservative terms possible by, for example, placing the short run dynamics of Keynes' theory against a backdrop that is remarkably similar to the classical model which Keynes himself rejects in Chapter 2.

Of course, I am fully aware that I am speaking of the theory itself, along with its implications. I am not speaking of or defending the man: it was Keynes after all who said "the class war will find me on the side of the educated bourgeoisie."

If God may play dice with the universe, can't Bernanke do the same with the economy?

http://blogs.reuters.com/felix-salmon/2009/05/21/can-we-inject-uncertainty-into-monetary-policy/

I found this link via marginalrevolution.

The main point of the article: uncertainty is useful in monetary policy because it can force people to be more cautious during economic upturns since there may be a probability (albeit small) that interest rates will increase during an economic boom. Thus, investors will factor in this risk of costlier investment when making decisions, forcing them to be less speculative.

It is clear that Salmon's argument is purely in the context of boom periods:

"The resulting uncertainty would force people to take a more defensive stance at all times, just in case rates went sharply upwards — even if the probability of such a rate hike was quite low."

But does it work in the case of a recession? Not really. Recessions, I would argue, are very different from booms. In a recession, you need people to be the opposite of cautious -- you need them to take risks. And you cannot promote risk-taking by saying there is a probability that rates actually may increase next FOMC meeting. And, since there is a lower limit on interest rates, expectations (in addition to easy money) play a central role in getting an economy out of a recession. Keynes said as much in his chapter in the General Theory on trade cycles: the initial drop into a recession may be caused by a crisis in either one of two phenomena (possibly both but not necessarily), credit or expectations. However, to get out of a recession you need to solve both problems of credit and expectations.

Shoddy analysis by Salmon aside, there is, of course, a larger political and ontological battle drummed up here.

The ontology: Salmon (and I, in fact) believes monetary policy has little real effect on an economy. We agree that policies like this are just one very small part of the workings of an economic system, and that in some sense (which I confess I do not completely understand myself) the system is overdetermined -- there are so many variables interacting in the economy that to think the interest rate is the key determining factor, or even a largely influential factor, is debatable.

The politics: Salmon (not I) believes monetary policy, or government intervention more generally, is largely trivial and therefore may do more harm than good. (This appears to be the same as the ontology but it is very different. I hope I need not explain why but let me know if clarification is needed.) Thus, by randomizing policy you in essence get rid of any possible room for government policy-- as Cowen suggests in his own comments on the article on his blog, "assume the return on gold follows a random path..." and we're back to debates over commodity-based currencies and laissez-faire political economy.

I believe that some fiscal and monetary policy is optimal, but that is based on my own views: investment is inherently unstable and does not follow the lines of the type of uncertainty discussed in Salmon's article: the nature of fundamental uncertainty is not probabilistic. Investment is guided, therefore, by animal spirits, which are only partly a function of rational calculation (not completely determined by it). So, government can help pick the economy back up in times of recession through direct investment in the economy.

You could say (a la Einstein) that while God may play dice with the universe Bernanke shouldn't play dice with the economy.

But, nevertheless, despite the philosophical and political backdrops, the case is poorly argued by Salmon because he fails to address both peaks and troughs of the business cycle.