Why Keynesianism doesn\’t work Part DXIV

The insight that the fiscal policy stance in the periphery prior to this crisis was insufficiently countercyclical

Talkin\’ about Spain and Ireland although the same was true of our own G. Brown in smaller measure.

Let us, for a moment, accept the basic Keynesian premise, that we should run great big stonking deficits to provide fiscal stimulus in the middle of a recession/depression.

That also means that we should run great big stonking budget surpluses in the middle to end periods of the largest and longest economic booms in advanced country history.

They don\’t quite have to be symmetrical given the effect of growth and inflation upon debt levels. The surpluses and the deficits that is.

But there does have to be, or at least there ought to be, some connection between the general size of them.

Now, look around you, we\’ve got countries that are, or have been, running deficits of 5, 10, 15% of GDP in those recessionary years. This implies (but for the above reasons of asymmetry not quite proves) that countries, back in that boom time or the next time a boom comes along, should be running surpluses of 5, 10, 15% of GDP.

And no, it\’s not just to save up the money to leave room to blow out the deficit again in the next recession. It\’s that this is what you\’re supposed to be doing to manage the economy: temper the booms just as you temper the recessions through fiscal policy.

OK, hands up, who can imagine anyone running a 2 or even 3% budget surplus consistently for some years, let alone 5 or 10%?

We actually had this ourselves: debt repayment in 2000, 2001 wasn\’t it? Before Brown splurged after the second election to \”invest\” in public services? To the great cheers of all at The G?

Quite: it\’s the politics of Keynesianism that clearly does not work. Doesn\’t in fact matter whether it actually works as economics, the incentives to politicians mean that it never will work in practice. Simply because the body politic would never let anyone get away with running the appropriate surpluses that are a necessary part of the complete theory.

Keyens may even have been right in his economics but that\’s not the appropriate argument. It\’s just not possible to make it work in this real world.

68 thoughts on “Why Keynesianism doesn\’t work Part DXIV”

  1. So Much For Subtlety

    Hasn’t Australia managed this? Didn’t they have a Liberal (ie conservative) government for about ten years before the present mess which paid off all their debt and left the country with a massive surplus? Only to have the present Labour government come in and spend it in about two weeks to no avail?

    I guess it depends if the electorate thinks paying off the debt is important. In the 1970s I can remember being told that debt did not matter because the more the government spent, the more economic growth they created and hence the easier it was to repay the debt. I can actually remember grown adults putting this case to me with a straight face. Now as long as the electorate believes they can have jam today without consequence, they may not care. But if they think it means higher interest rates later on, they may be more careful.

    But on the whole it is probably a good reason for the Gold Standard. After all, a lot of people support/ed the EMU and the Euro because it would provide the same discipline. As long as the Germans didn’t want jam today as well.

  2. You’re in Dearieme’s Dad mode again, Tim. The other reason it wouldn’t work, the old boy told me, was that “once bitten, twice shy” i.e. once businessmen knew that governments would fake a recovery by splurging money while having every intention of withdrawing the funds as soon as things perked up, they’d assume that the said recovery was temporary and avoid making long term investments that could be justified only if the recovery were to be sustained.

    It’s somewhat akin to warning somebody that you’re going to defraud him and expecting that you can still pull the trick off. It’s odd that such a very clever chap as Keynes didn’t see the problem – but perhaps he did, and all he was advocating was pulling off the stunt once.

  3. Dearieme-

    Keynes makes the same error as regards using inflation to slyly cut wages. Once people know there is inflation, they’ll automatically demand inflation-compensating wage increases. Keynes acts as if the proletariat are too dim-witted to ever cotton onto this due to their miasma of “money illusion”.

    I mean, the whole theory is obvious cobblers anyway, but what’s sad about it is the number of very basic errors, many of which are due to his trying to create an economic theory based on human psychology, whilst his having very little grasp of human psychology. “Propensity to consume”? Lolz. Etc.

  4. SMFS: yes, but no. Howard inherited a small debt, which he turned into a smaller positive balance (a gross debt, but a net positive balance of about 5% of GDP). Now, in the face of a global recession, there’s a net debt again.

    That is, Australian governments have indeed acted according to Keynes. But they’ve been modest about it. The numbers have never been “massive”.

  5. Hasn’t Germany been pretty successful (since the end of the War) at running a countercyclical economic policy?

  6. If an economist is someone who, when he finds something that works in practice, tries to make it work in theory, a politician must be someone who finds something that works in theory and demonstrates it can never work in practice.

  7. If we are running a surplus to temper the boom rather than to save money, why would there be any relation between the size of the deficit and the size of the following surplus?

  8. What you actually need to address the problem Keynes is trying to address is some kind of system that prevents the excessive lending during the Boom years. Like, a free market banking system that runs out of money to lend, causing interest rates to rise, choking off lending before it gets to unrepayable levels.

    I know, I know. Crazy.

  9. A free market banking system which isn’t able to create money through loans?
    Seems like you are still going to have to rely on government regulation for that one.

  10. In a genuine free market, the fractional reserve ratio is moderated by the risk of bankruptcy. Idiot lenders get eradicated from the marketplace, kind of thing. Free banks are quite at liberty to create loans and thus money, but the more they create the more risk of collapse they run.

  11. The other problem with the current system is the incessant creation of new reserves, which is why any future, quasi-stable system has to be one in which governments are banned from borrowing (using taxpayers’ future taxes as collateral).

  12. But it’s very likely that the idiot lenders will on mass all assume that property prices have reached a permanantly high plateau or whatever and end up getting wiped out by bancrupcy at exactly the same time, unless there is some external mechanism to constrain them.
    It sounds like a system in which people are banned from saving safely, not sure if that will be good for society.

  13. A (non-rhetorical) question – if a country’s debt is increasing in nominal terms, but decreasing as a percentage of GDP, is that country running a fiscal deficit or surplus?

  14. Mark, that’s a matter of debate. But the point is, if they do do that, they won’t do it twice.

    There are a bunch of justificational drivers of the current neverending car crash of a financial system. One of them is the belief, popular on both Left and Right, that lending “drives” the economy, so the more of it there is, the better the economy runs. The creation of a free market will teach people some harsh lessons. But they are lessons that need to be learned, once and for all.

  15. Ian B
    I sympathise entirely – It is a dearly held hope of mine that all of the people in the world shall become wiser, more considerate, knowledgable and kinder to each other. Very little can change without a general shift in popular thought.
    Unfortunately, I have a terrible feeling that destroying the savings of people with no interest in financial matters will not achieve this goal. Harsh lessons make for harsh people and we don’t need more of those.
    If you want an economy which isn’t driven by bank lending, you’re going to have a government producing the money.

  16. Luke –
    I’d guess in basic terms, it depends on the definition of deficit. I’d imagine that if the government is spending more than it receives in tax, that is a deficit,

    In real terms, it depends on the effect of an increasing (real) public debt on the economy. I’m not sure that anyone really knows what this is.

  17. No, but I think it is only possible to have a system where banks are free to do whatever they want if what they do doesn’t matter very much.

  18. Mark,

    Interest (on savings or any other money loaned to a bank by a “depositor”) is compensation for risk. If you want people to be paid interest for not taking risk, you’ve got an inherently unstable system.

    Currently, people have to risk savings to earn interest, because the currency is constantly, deliberately, devalued by the government/banking system. If government delivers an inflation-free economy, it becomes reasonable to expect those with savings to accept risk if they desire to earn interest on those savings.

    Of course, people will want both. They want the interest, but not the risk. One day, we’re going to have to choose between the two.

  19. Ian,
    interest isn’t neccesarily a reward for risk – until quite recently inflation linked bonds had a real return. National savings still do.
    Perhaps interest is a way of rewarding people for working now and an acknowledgement that things will be better in the future.
    If we are becoming better at producing things, why shouldn’t my present work be rewarded with a greater amount in the future?

  20. Mark, to clarify;

    In a free market interest is a compensation for risk. Of course governments can just hand out “interest” willy nilly. It’s not their money, after all.

  21. mark
    You can’t guarantee anything about the future, what you are advocating is basically what has happened with pensions, people were supposed to be rewarded in the future with part of the product of their present labour, it hasn’t quite worked out like that.

  22. Ian
    But is there any reason why interest and low (no)risk are incompatible?

    I propose that we set up a programme which automatically alters the term “free market” to “shangri la” . Risk has been used as a justification for interest, but I’m not sure that is the whole story…

    Money belongs to society and government represents society.

  23. Mark,

    Hmmm. I’ve thought of several ways of approaching this. I think that one way to answer it is that if some item of lending is zero risk, lenders in a free market can compete with each other to an arbitrarily low interest rate (in an inflation free economy of course). So the no-risk rate tends towards zero.

    One could argue that it still neesd to be high enough to compensate for deferred consumption. The problem there is that savers have already decided to defer consumption (for the benefit of future consumption in their old age) so the savings are “just sitting there” regardless of whether loaned or not. So, the former argument applies and the savers’ brokers will be forced down to a very, very low interest rate which tends asymptotically toward zero again.

  24. @ Mark,

    ‘A free market banking system which isn’t able to create money through loans?
    Seems like you are still going to have to rely on government regulation for that one.’

    What you would need is the general law to be enforced, rather than regulation. It is government regulations which have created privileges to the banks, so that the general law is not applied.

    “If you want an economy which isn’t driven by bank lending, you’re going to have a government producing the money.”

    I don’t see how the one follows the other. Economic growth comes from saving and investment. Banks have an important function in the economy for co-ordinating this saving and investment, but they have severed the direct link between the two by creating a load of funny money out of thin air, which leads us into the boom and the bust of the business cycle.

    The alternative to this is not to hand over responsibility to the government to control the creation of money. Politicians will never resist the temptation to misuse such power. The alternative is to go back to the system whereby saving and investment are entwined, and interest rates are set by the market. Only in this way will the economy grow in a healthy manner rather than under the false stimulus of inflation.

  25. @ Mark,

    “Money belongs to society and government represents society.”

    I suggest you build a huge pyramid of skulls, paint that slogan on it and enter it for the Turner Prize, perhaps with the title ‘The Glory of Collectivism’.

  26. Public sector workers receive their pension courtesy of other taxpayers, I should know I was one. This is a bad example to choose anyway, the public sector is having its pension rights curtailed because governments no longer think the state can afford to be so generous, whether they are correct or not about this doesn’t matter, it’s what the state wants so it will happen. This is where it all goes wrong, you can have your system where the government represents society but if the government changes the rules society has to lump it.
    I agree with what Ian B said about interest being compensation for deferred consumption, if you’re the mark I was recommending Bastiat to at Counting Cats the other day, I will recommend him again, he covers this well.

  27. @ Ian B,

    “So the no-risk rate tends towards zero.”

    Certainly the borrowing rate decreases as risk decreases, but not to zero but to the natural rate of interest which is determined by time preference. The level of risk is built into a premium on the natural rate of interest.

  28. Trooper-

    ut not to zero but to the natural rate of interest which is determined by time preference.

    I’m not entirely convinced of that. The problem I have is that time preference sets the amount I will save regardless of interest I may get on savings. If I think I need to save X in order to pay for my old age, I’ll do that even if I’m sticking it in a shoebox under the bed. So the rate at which I may be prepared to lend it to somebody else isn’t linked to my time preference, since I will defer that consumption regardless.

  29. Baram-Ba-Daaaam … blow the libertarian trumpet of justice… we are forming up against good sense.

    The original question was whether or not it was possible to have a risk free return on savings. It seems clear to me that the answer is an unequivocal yes, if we decide we wish to provide it. The only limit is the real capacity of the economy.

    Even if it is possible, should we do it?  First of all, just because we might imagine that the laws of shangri-la dictate that each man acting in his own interest will provide the best result for society doesn’t mean that imagining society as an individual acting in his own interest will produce the best result for any individual. People may well save for no interest, as they would probably work for a loaf of bread, but it is only really in societies interest to drive them down to this level if we have a shortage of bread and only to society’s benefit to reduce the interest on saving if we fear for production in the future.
    By the way, if the word society is associated with death and murder for you, might be time to do a bit of mental spring cleaning. 
    Yes, people in large groups can be induced to do all kinds of terrible things to each other – they can also do good things as well. 

    And we can only ever make good on our savings courtesy of other members of society. That is what saving is

  30. Mark, who is this “we” of which you speak? “Society”? Fair enough. What’s the actual mechanism by which “we” provide this risk-free return on savings?

    Interest is money paid to lenders by borrowers for borrowing their money. Thus, inevitably there is risk, because the borrowers may default on the loans. As we saw recently in the Crash. So, what’s your specific mechanism for solving this intrinsic risk problem?

  31. mark
    “The original question was whether or not it was possible to have a risk free return on savings. It seems clear to me that the answer is an unequivocal yes, if we decide we wish to provide it. The only limit is the real capacity of the economy.”

    So you think that intentions will automatically produce results, a form of magical thinking. You sound like one of those people who believes that you can ask the universe for what you want and somehow it will materialise.

  32. Interest is money paid to savers by society as a reward for working and a recognition that things will be better in the future. Incidently, if people consume now, it will cost us more in real terms because we are less efficient at producing things.
    The mechanism… we agree to do things for money and give savers money?

    A million and one things could make saving a pointless activity, but there is no law which dictates that risk should be the primary consideration when it comes to return.

  33. Philip Scott Thomas

    Keynes acts as if the proletariat are too dim-witted to ever cotton onto this due to their miasma of “money illusion”.

    Yes, this is part of the reason I’m not convinced that Keynes can be taken at all seriously.

    The Bloomsbury Group were, despite their professed liberalism, a tightly-related group of family relations and friends. One could even call them incestuous, not only metaphorically but literally: Duncan Grant was, for instance, for some time his cousin Lytton Strachey’s lover.

    Outside this close group were the second tier, which included not only E. M. Forster, but also John M. Keynes. Keynes eventually accomplished something of a sexual coup with the group, becoming Grant’s lover.

    It’s fairly obvious from the Group’s collective journals that Keynes was little more than a trained pet, meant to be stroked and petted and (at least in Grant’s case) fucked.

    So – the question has to come: to what extent did Keynes really believe his bilge? How much of it was designed only to appeal to those whose favour he wished to gain – that same group who fancied themselves ‘radicals’ and who created The Great Dreadnought Incident of 1911?

  34. Mark

    Interest is money paid to savers by society as a reward for working and a recognition that things will be better in the future.

    No Mark, it isn’t any of that. I’m not stating my opinion or preference here. You’re simply wrong. The most basic definition of interest would be something like, “it is a rental fee for money borrowed”. If you want to borrow £100 off me, I say, “sure, but only if you’ll give me £105 back”. It’s nothing to do with “society” or “rewards for working” or anything else. You’re just making stuff up.

  35. Philip Scott Thomas-

    My own opinion for what it’s worth is that Keynes did believe his bilge and did so because he was a narcissist. He was a successful version of that type of internet person who declares his own theory of Physics that dwards those of Einstein, Bohr, etc. Hence his “General Theory” replacing mere “partial” or “special case” theories by lesser minds before him.

    I really think he had no capability for self-crtiticism; any idea that came into his head was certainly right, in his mind.

    The thing that intrigues me about him is numerous reports that he was immensely charismatic. There doesn’t seem to be any film of him, and the photos show a very strange and unimpressive looking man, but apparently he did have intense charisma. Mind you, people said that about Hitler too, and he looks stupid in movie clips. So maybe you had to be there, kind of thing.

    The General Theory reads to me as a book that ought to be titled “Why The Economy Should Be Run By John Maynard Keynes, by John Maynard Keynes”.

  36. Philip Scott Thomas

    Ian B –

    Point taken, but I’m not so sure.

    Charles Ryder was willing to paint murals on Lady Flyte’s morning room walls because he was desperate to be accepted by the landed gentry.

    I’m not convinced that Keynes was so different.

    BTW, have you come across Jonah Goldberg’s Liberal Fascism? It takes your theory of neo-Puritanism and puts massive great knobs on it.

  37. My own opinion (and it’s worth a lot) is that Ian B hasn’t understood a word Keynes wrote, and that any theory advanced by Jonah Goldberg is well-nigh certain to be vacuous.

    But please don’t let me distract you from your frottage.

  38. Clearly Tim has no idea of what he is talking about and no interest in knowing what he is talking about. I’d like to think that over on your side of the pond one cannot be as successful at promoting right-wing stupidity and nonsense as you clearly can be on this side. But then I look at some of your comments.

  39. Philip-

    I haven’t read it, but I know of it. I’ll add it to my “things to do” list.

    PaulB-

    Assuming that a critic hasn’t “understood” a theory, book, movie, whatever, is a common counter-criticism. Sometimes it is valid, sometimes it isn’t. It’s proving which that is the hard part.

  40. Ian B: the interested reader, if there are any such, might care to study our discussion in this thread, in which you repeatedly and absurdly insist that “Keynes states that the multiplier k is the same figure as the MPC”.

  41. So Much For Subtlety

    mark – “The original question was whether or not it was possible to have a risk free return on savings. It seems clear to me that the answer is an unequivocal yes, if we decide we wish to provide it. The only limit is the real capacity of the economy.”

    How is it possible to have a risk-free return on savings? Surely all you can do is transfer the risk to someone else.

    “Even if it is possible, should we do it?”

    First you have to ask is can we do it. It may be possible, but you have not shown it is. If it is, it is almost certain the market would have got to it first. So it would be offered commercially. The fact it isn’t suggests it is not possible. Even if we can do it, you then have to ask whether it is worth the cost of doing it. It may be so expensive that it is not worth doing.

    “First of all, just because we might imagine that the laws of shangri-la dictate that each man acting in his own interest will provide the best result for society doesn’t mean that imagining society as an individual acting in his own interest will produce the best result for any individual.”

    That is true. It may be that free competition will produce the worst result or at least a non-optimal result. Tragedy of the Commons and all that. But the question is whether it is possible to rectify this through legislation action. And all the evidence seems to suggest not or at least only in extremely limited circumstances.

    “and only to society’s benefit to reduce the interest on saving if we fear for production in the future.”

    I don’t know. Offhand it is hard to think of a circumstance where low interest rates are not a good thing. As long as people continue to save. I expect that this is driven by the age profile of the population – young people have very different views than old people and they may prefer to punish savers.

    “By the way, if the word society is associated with death and murder for you, might be time to do a bit of mental spring cleaning.”

    But on the other hand if the word “socialism” is associated with death and murder for you, it shows you have been paying attention to the history of the 20th century.

  42. Ian B,
    You are assuming that the borrower actually wants to borrow the money and that the lender is loathe to do so. I’m not sure that either assumption is correct with respect to ordinary savers and the government.

    Thornvalis, so much…,

    OK, fair enough, instead of no risk, shall we say low- risk?

    “Offhand it is hard to think of a circumstance where low interest rates are not a good thing.”
    Really?

  43. mark
    “You are assuming that the borrower actually wants to borrow the money”
    The borrower does not have to, so we must assume by any definition they want to, borrow said money.

  44. PaulB-

    From The General Theory

    “It tells us that, when there is an increment of aggregate investment, income will increase by an amount which is k times the increment of investment”

    and then-

    “It follows, therefore, that, if the consumption psychology of the community is such that they will choose to consume, e.g. nine-tenths of an increment of income, then the multi-
    plier k is 10; and the total employment caused by (e.g.) increased public works will be ten times the primary employment provided by the public works themselves”

    So, to indulge in Keynesian pseudo-math, we would get

    k=1/(1-mpc)

    Fans of the Keynesian stylee will enjoy how he switches from a formula (propensity to consume) to its first derivative (marginal propensity to consume) by simply slapping deltas in front of everything, and then arbitrarily flops from “income” to “employment” without any justification.

    The result of all this nonsense is the infamous conclusion that if the government “invests” i.e. spends one pound sterling, and nobody who gets it invests it, but consumes it all, it will generate an infinite amount of income (or is it employment?) due to the divide by zero.

  45. Well done Ian, you’ve finally got the formula right: I flatter myself that I’ve taught you something.

    However, if you don’t understand why Marginal Propensity to Consume is the appropriate thing to use here, there’s a long way to go…

  46. Paul,

    The relation between k and mpc is so trivial that “the same figure” is an appropriate description in a discussion.

    But, as I said in the other thread and numerous others, there is no “propensity to consume”, let alone a marginal one. The “consumption psychology of the community” doesn’t work in proportions, and the arithmetic he derives from that assumption is thus literally meaningless.

    It is as if Keynes notes that somebody has bought a pizza, eaten half, and put the other half in the fridge for later, and he therefore concludes that the subject has an internal “eat half of however much pizza I have” variable; therefore if given two pizzas he will eat one and save one, and if given a hundred he will eat fifty and save fifty.

    People just don’t work that way.

    Hence, the Keynesian hides in “marginal”, thus allowing him to cling to a “consumption function” which admits that our pizza eater’s behaviour will change as he gets more pizza. But still, he does not decide whether or not to eat based upon proportions, or marginal proportions. Having eaten his fill, his marginal propensity to consume pizza falls to zero. (Which means that if the government puts pizza in the fridge, the total pizzas in the economy rise to infinity).

    There simply aren’t any such functions, because the relations described in the equations do not exist. You can only write an equation containing a multiplying factor if some term actually is a multiple of another term. Keynes just derives arbitrary ratios. It looks like maths, but it isn’t maths.

  47. Bit like following the recipe for stew when you’ve bought the ingredients for souffle.

  48. uh huh. So if an previously unemployed person gets a job, and a substantial increase in income with it, their expenditure doesn’t go up?

    Which planet are you making your observations on?

  49. Congratulations Paul, this is your 1000th “completely missed the point” comment. Your prize notification is in the post.

  50. FWIW, the existence of an MPC that’s applied to the whole economy/population, doesn’t imply that all individual agents have the same MPC. I know Austrians don’t like aggregation, but the process of converting the individual MPCs into a national one is mathematically straightforward – I would have thought it more palatable than such concepts as ‘the price level’ or ‘aggregate demand’ which I know make Austrians retch.

    As PaulB says, it is quite clear that an individual’s consumption is expected to rise as her income does. In the simplest possible model, assume the consumption function is linear hence MPC is constant (and the differencing method is valid). Of course other models are available, but I can’t see why – empirically or theoretically – an individual’s income should be disregarded when modelling her consumption. The only alternative I can see is to believe nothing can be modelled at all, an approach that would involve a massive loss of explanatory and predictive power, and make it difficult to derive any substantive results.

  51. The only alternative I can see is to believe nothing can be modelled at all, an approach that would involve a massive loss of explanatory and predictive power, and make it difficult to derive any substantive results.

    “I believe in clairvoyance because if it didn’t exist we couldn’t predict the future”.

    Indeed, we couldn’t. Austrians don’t dispute these models because we don’t want them. We dispute them because there is sound logic that says they are at best useless and at worst catastrophically misleading.

    Keynes’s models are rather unique in not being just wrong and catastrophically misleading, but woefully inept at the basic arithmetic level. There isn’t any consumption function. The whole model is just fundamentally broken for the reasons discussed above in in that other thread. That’s all there is to it.

    And no, general and vague observations like “if Alice has more money she’ll spend more money” (like, Duh!) don’t help at all. As I keep pointing out, Keynes’s arithmetic tells us that if the government “Invests” some money building pyramids, and none of these people with their “consumption functions” saves this magic pound (magic because somehow the economy knows it’s a government-created pound other than an ordinary one), production (or consumption or income or employment (Keynes swaps at random)) will rise to infinity.

    Which is claptrap.

  52. Yes Ian. It’s true that if you make an impossible assumption, you reach an impossible conclusion. True, but not informative. Perhaps you could now stop repeating your example of it.

    You really really ought to stop slagging off Keynes’ grasp of his mathematics. The evidence that he knew what he was doing with maths is overwhelming, and the evidence that you know what you’re doing there is invisible. That’s not to say that Keynes was always right, or that we haven’t learnt more since he was working, or that conditions are unchanged. But it is to say that you’re not going to prove him wrong with the childish abuse you’ve come up with.

  53. The evidence that he knew what he was doing with maths is overwhelming,

    Ah yes, the total failure of Keynesian policies to produce the predicted results is proof of their correctness.

    You have entirely failed to answer my criticism of Keynes’s arithmetic, because you can’t; no Keynesian has ever been able to answer it. I am not the first to present this criticism, of course.

    Keynes made a very simple, straightforward assertion in the passages I quoted. Explain clearly what I’ve got wrong, as regards the arithmetic.

  54. Ian, you haven’t made any coherent criticism of the arithmetic. The only thing you’ve said that even begins to make sense is that if you assume that infinite consumption is possible then there must be infinite production to support it. And, in so far as the assumption is meaningful, I agree with you.

  55. No. Let’s try again. Point me at an example you’ve posted of Keynes being “woefully inept at the basic arithmetic level”, and I’ll be happy to explain gently what it is you’ve misunderstood.

  56. You’re not even trying, Paul. I have explained the point multiple times, and you are either being deliberately obtuse, or you’re being deliberately obtuse. Or possibly, you’re being deliberately obtuse.

    Google Hazlitt’s “Failure Of The New Economics”. Read it. It explains in far more detail than I can in a comment section why Keynes’s arithmetic on the multiplier is in the “not even wrong” category. But, you don’t want it to be wrong, so it wouldn’t matter who spelled it out for you, you would just keep saying “Well, I don’t see the problem” and “you haven’t made a good point” and so on.

    I can lead you to water, but I can’t make you drink. Nobody can.

  57. “I can lead you to water, but I can’t make you drink. Nobody can.”

    The guys running Guantanamo are pretty good at it.

  58. “There isn’t any consumption function … And no, general and vague observations like “if Alice has more money she’ll spend more money” (like, Duh!) don’t help at all.”

    That “general and vague” observation denotes a relationship between income and consumption, and would seem a good starting point for modelling. The simplest possible model consistent with an increasing relationship between income and consumption is a linear one, and in that case basic maths tells you that there’s a positive MPC. Further, if you make a second “general and vague” observation – that the increase in spending after an income-rise is less than the income-rise itself – then we have deduced that in this model MPC < 1.

    For what it's worth your pizza example is based on a different set of observations. If we write Y for real income (measured in terms of pizzas), your statement that people eat up to half a pizza, but beyond that are sated and eat no more, implies there actually IS a consumption function. It's C(Y) = Y for Y0.5. Hence in this model MPC is 1 for Y0.5: people consume everything they earn until they are sated, whereupon they spend nothing. (All this is an immediate and natural consequence of your model specification: I’m not forcing a consumption function or MPC on your model, your model contained it all along.)

    But that model seems less convincing, because in reality people rarely seem sated. Sticking with pizzas: after a pay rise Alice may not eat more pizza but she may be consuming Waitrose Luxury Pizzas that cost five times more than (i.e. can be bartered for five times as many) Lidl Value Pizzas she was eating before. But as the balance of her consumption switches to the more expensive pizzas, she may prefer not to use her entire pay rise on immediate pizza upgrading, and put something away for future consumption. In this case the MPC may no longer be a step function of income; there will be some levels of income whereby Alice’s MPC lies between 0 and 1. As happened in your model though, we expect MPC to be closer to 0 as Alice’s income rises. But there’s nothing wrong with that; we expect agent’s with different income levels to have different MPCs, and rich people tend to have lower MPCs than poor people.

  59. Bugger, the inequality signs don’t come out properly.

    Ian’s consumption function is C(Y) = Y for Y below 0.5 and C(Y) = 0.5 for Y above 0.5; Ian’s MPCs are 1 if Y below 0.5 and 0 if Y above 0.5.

    Also apologies for apostrophe abuse in final para. Memo to self: don’t rewrite and rearrange a sentence once half-written, better to delete it entirely and start again…

  60. Ian, thanks for telling us where you get your incoherent criticisms from. I’ve not read the book, but I’d assumed Hazlitt would have made a better job of dissing Keynes. Perhaps you misrepresent him.

    Oh, and I genuinely have no idea what you mean when you say that whereas a person will tend to spend some fraction of an increase in their income, it’s useless to speak of a Marginal Propensity to Consume, defined as the fraction of increased income that is spent.

  61. Paul. It’s not the only place, and a fact is a fact wherever it comes from. I’m not arguing from authority. I’m just stating that it’s bunk, and explaining why. Hazlitt’s book happens to do a very thorough debunking, but the arguments can be made by anyone. Even me.

    It is interesting to note that you haven’t answered a single one of my criticisms, other than with feeble name calling. You’ve put up a pretty poor show here. I strongly suspect that you don’t really understand Keynes which is why you don’t understand the criticisms; you merely repeat parts of his theories in a superficial manner. This may be quite common among Keynes’s supporters.

    Read the book. There are others, but that’s a good one to start with. You may even understand Keynesianism by the end of it.

    I have to say, you really are infuriating. To spend this much time arguing, and not make a single substantive point… what a waste of both my time and yours.

  62. IanB: I think you’re just talking past each other. But I’m genuinely curious why you don’t believe the consumption function exists. If you want to discuss something substantive: if you dislike the aggregation stage, what’s wrong with the individual consumption function in posts 64-65? Your example, where you were trying to prove there was no consumption function, appeared to specify a consumption function (albeit a nonstandard one), complete with MPCs.

  63. Ian. Yes, I agree, it’s been a waste of time. I leave you to your unshakeable belief that you understand mathematics better than did Keynes and that anyone who fails to recognize that is infuriating.

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