Most Odd

Dan Roberts does a column on confidence in the economy, the importance of it in fact.

But he doesn\’t mention the most famous economist to have commented upon the matter, Keynes, with his comments about "animal spirits".

Not important, just odd not to do so.

9 comments on “Most Odd

  1. For (? the many) readers untutored in Keynes’s General Theory of Employment, Interest and Money (1936), here is the relevant passage in context:

    “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; — though fears of loss may have a basis no more reasonable than hopes of profit had before.”

  2. Keynes’s wonderful prose is a model for us all but there can be little doubt about the General Theory being a very perplexing book to read and digest.

    There was a protracted debate among economists in the late 1930s and into the 1940s and beyond as to the intentions and essentials of his new theory as well as the policy implications. The motivation – which was often misundertood at the time and has been since – is reasonably clear:

    “In particular, it is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed it seems capable of remaining in a chronic condition of sub-normal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.” [p.249]

    As for the essential features of his new theory, he didn’t facilitate a clear consensus by his tending to endorse several rival interpretations, including this by John Hicks, which arguably did much to foster the popularity of “keynesianism” – a belief that governments should maintain proactive fiscal policies to ensure continuous “full employment”, the unintended consequence of which was install an inflation escalator in economies that adopted such a policy and which is why Milton Friedman later attacked keynesianism:

    It is arguable on the evidence that one of the main reasons for the early internal popularity of the Nazis in Germany after Hitler became Chancellor in January 1933 was because debt financed spending by the Nazi government on building autobahns, stadiums and civic buildings helped to reduce the horrendously high level of unemployment “. . from 6 million in October 1933 to 4.1 million a year later, 2.8 million in February 1935, 2.5 million in February 1936, and 1.2 million in February 1937.” [CP Kindleberger: The World in Depression 1929-1939 (Allen Lane, 1973) p.240]

    Hence, this assessment:

    “The Nazi Party leaders were savvy enough to realise that pure racial anti-semitism would not set the party apart from the pack of racist, anti-semitic, and ultranationalist groups that abounded in post-1918 Germany. Instead, I would suggest, the Nazi success can be attributed largely to the economic proposals found in the party’s programs, which in an uncanny fashion integrated elements of 18th and 19th century nationalist-etatist philosophy with Keynesian economics. Nationalist etatism is an ideology that rejects economic liberalism and promotes the right of the state to intervene in all spheres of life including the economy.” [Brustein: The Logic of Evil – The Social Origins of the Nazi Party 1925-33 (Yale UP, 1996), p.51]

    Btw Harold Macmillan’s book: The Middle Way (1938), was intended to convert the Conservative Party to keynesianism.

  3. Keynes proved persuasive by an elegance in phrasing economic misconceptions that were neither new nor original (nor has that baleful influence been properly discredited even now).

    “Volatility due to speculation ” is just such a sort of economic canard by means of which the demagogue (whether politician or professor) perpetuates ignorance , not only of the masses generally, but of the rising generation of the educated strata.

    Speculators, as a class, are always present when not proscribed. For them to be perceived as contributing to volatility (much less causing it) when their actions (at both high and low ends) set both bounds on such volatility as already
    exists in the structure of prices–is typical of the economic ignorance prevailing before ever there was discovered the relationship between
    supply and demand that led to the science of economics. Keynes was essentially an “anti-economist” intent on providing justifying rationales for the always-present proponents of coercion and expropriation.

  4. Gene – I must say that I disagree with most of your comment.

    It is certainly aguable that several other economists – notably Kalecki, in Poland, and Tinbergen in the Netherlands – arrived at broadly comparable conclusions and theories with Keynes at about the same time and perhaps expressed their respective theories in clearer ways with less grand prose and more mathematics but that only came to be appreciated later. Try a recent paper by Prof Sawyer on Kalecki:

    What is for sure is that the revolution in macroeconomics changed the ways in which economists thought about the problems of unemployment and inflation. Mainstream economics was very different after the revolution in macroeconomics than before. The stagnation of Japan’s economy after 1992 through the rest of the 1990s showed that it is indeed possible for an economy to get stuck in a low-level equilibrium with the general level of prices declining year on year because of endemic deflation.

    While the Nazi government in Germany was successful in reducing unemployment through debt funded public works programmes – and containing any inflationary tendencies by extensive administrative controls over prices, wages and private investment as well as on imports to maintain the gold value of the Reich Mark – HM Treasury in Britain was taking the line that debt funded public works programmes would not reduce reduce unemployment because public spending would “crowd out” equivalent private investment.

    Instead, in September 1931, the new National Government allowed Pound Sterling to float in the foreign exchange markets and interest rates were cut as there was no longer any need to keep interest rates high to support the gold value of the Pound. Thereafter, Britain rode out the depression through to WW2 with a mostly laissez-faire policy. During the war, however, keynesianism took root in HM Treasury, partly because Keynes was established as an adviser there (hence: “How to Pay for the War”) but also because young blades there like James Meade became forceful and illuminating exponents of keynesianism.

    Britain emerged from WW2 with a commitment by the coalition government to the “maintenance of a high and stable level of employment” after the war as set out in the employment policy white paper of 1944 – but see this historical assessment by Roger Middleton on: The Rise and Fall of the Managed Economy:

    In America, keynesianism was promoted in academia during the 1940s by Alvin Hansen at Harvard and by Paul Samuelson at the MIT though his famous textbook. Abba Lerner sought to popularise the case for “functional finance” with his text: The Economics of Employment (1951).

  5. Addendum:

    In Britain, I suppose the official government obituary on any residual keynesian commitment to maintain “full employment” came with “Callaghan’s famous 1976 denial that governments could spend their way into full employment . .”

    Curiously, here is Gordon Brown recently on Keynes (26 November 2007):

    “For most of the past half century we have had a Keynesian paradigm – either you are in work or you are on welfare. And in the old days it was the economy that had to create work – what prevented full employment was lack of jobs. Now we need a new and very different paradigm. If in the old days the problem as unemployment, in the new world it is employability. If in the old days lack of jobs demanded priority action, in the new world it is lack of skills.”

    And in the Financial Times at the same time (25 November 2007), we have Lawrence Summers (famously renown professor of economics at Harvard and US Treasury Secretary in the Clinton administration) saying what urgently needs to be done to avert a coming recession in America:

    Who are we to believe? Another turn in the wheel of history?

  6. Bob:

    Old saying: “If you can’t dazzle ’em with brilliance, baffle ’em with bullshit!”

    In the piece I addressed–trying to point out an erroneous (and potentially inflammatory) assumption, you cite five authors in support of the broader contention (not necessarily for the criticized assumption). I do’nt beg off reviewing what they’ve have said–there’s no need.; I hadn’t addressed Keynes’ message–merely pointed to the introductory fallacy (and made generalizations abou the remainder). You “disagree” without citing even a single item for disapproval or counter-explanation but go on, instead, to cite another half-dozen whose works, we must presume, dispose of the argument I’d raised.

    Let’s keep it as simple as I’d made it originally. I took issue with Keynes’ phrase “volatility due to speculation” and termed it a canard; further, I made comments and drew conclusions about someone perpetuating and disseminating such economic misinformation.

    As I see it, the only substantive issue is “truth content”–in economic terms–of the criticized quotation. Did Keynes proceed from fact in his elaboration or from fallacious political tinder? I know nothing of your own habits of thinking but will freely confess that I tend to dismiss all that issues after a contrary-to-fact opening statement or assumption. In the world thrown together by nature, we use many processes to separate an ounce of gold from a ton of overburden, I do not expect the same in a quest for truth assembled by supposedly disinterested experts. Where I find what is true or at least likely, I proceed; where I find error–especially of a type fairly reeking of falsity–I cut my losses (in time) and turn attention to something else.

    There’s only one question here of any interest. Is volatility in market prices the cause or the effect of speculative activity? Does speculative activity intensify or ameliorate volatility?

    I took a clear position–against Keynes and his sort–on this issue; further, I summed my position in just a couple of sentences about the core matter. Is Keynes right–or am I? Would you care to explain your opposition to my explanation (of speculation/volatility) with some words I can understand (as opposed to trundling out a parade of–I suppose–widely respected authorities and their papers?

  7. “Let’s keep it as simple as I’d made it originally. I took issue with Keynes’ phrase ‘volatility due to speculation’ and termed it a canard; further, I made comments and drew conclusions about someone perpetuating and disseminating such economic misinformation. . . ”

    That is bullshit because it entirely misses what Keynes was trying to do – namely, to develop a theory that could account for how economies could get stuck at a low-equilibrium with persistently high unemployment and prices falling on trend. The stagnation of Japan’s economy through the 1990s show that such situations can and do occur.

    Comparison of regular economics texts for students pre and post the revolution in macroeconomics of the late 1930s show a huge difference.

    After the revolution, economists tended to focus on what is driving aggregate effective demand and whether aggregate demand is likely to be sufficient to maintain a high and stable level of employment. And it you don’t believe me then I suggest you go away and look at early editions of (Nobel laureate) Paul Samuelson’s popular textbook or refer to Abba Lerner’s The Economics of Employment or get to grips with Hicks on Keynes and the Classics, which was widely recommended to undergraduate students for several decades:

    Otherwise, try this popular exposition on: The Keynesian Impact on Public Policy:

    And if you can’t follow that and the citations then the fault is yours.

  8. Bob:

    It’s fairly clear that you don’t want to answer the direct question and have gone to significant lengths to avoid facing it.

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