Section I: After two introductory paragraphs in which a fairly clear concept is muddled by ill-defined terms, Keynes offers us a number of equations. Here are the first two: "Let Z be the aggregate supply price of the output from employing N men, the relationship between Z and N being written Z = φ(N), which can be called the Aggregate Supply Function. Similarly, let D be the proceeds which entrepreneurs expect to receive from the employment of N men, the relationship between D and N being written D = f(N), which can be called the Aggregate Demand Function."
There are a number of problems with these equations. First, while there is a general relationship between the number of people employed and the "aggregate supply price", this is not a mathematical function, such that any increase in N would lead to an increase in Z. Hiring a certain individual would cost more than hiring another individual; again, different individuals do different amounts of work. By giving equations, Keynes leads the reader to believe that a certainty exists where there isn't one. It follows that any attempt to combine an equation which is nothing more than a vague relationship will lead to problems.
In addition to the problem with treating N as an aggregate, there is a larger problem with the second equation. D represents "the proceeds which entrepreneurs expect to receive"; but the expectations of entrepreneurs are of less importance than what actually occurs. If the expectations are high, but these expectations are unwarranted--say, if contractors were employing a large number of men to build real estate in 2007--the economy may nonetheless be in very serious trouble. In fact, a large variance between expectation and reality is a reasonable definition for a recession. Unless Keynes has another equation to track reality, I don't see how this second equation will help him.
In what is becoming routine for him, Keynes lays into "the classical theory" in this section: "The classical theory assumes, in other words, that the aggregate demand price (or proceeds) always accommodates itself to the aggregate supply price; so that, whatever the value of N may be, the proceeds D assume a value equal to the aggregate supply price Z which corresponds to N. " Now, you'll have to correct me if I'm wrong on this, but the assumption of the classical theory is full employment in equilibrium. In other words, there is only one value for N. This is not to say that full employment always exists; the economy is a series of moving parts, so equilibrium is always changing. Hence, even the smoothest running economy will have frictional unemployment. Keynes seems to think that none of his predecessors were aware of this.
Another general point: Keynes often speaks in such a way as to confuse the reader about the real relationship between two things. For instance, he writes: "For entrepreneurs will endeavour to fix the amount of employment at the level which they expect to maximise the excess of the proceeds over the factor cost." But no entrepreneur actually thinks this way. Instead, he asks himself if he can afford to hire an individual at a certain cost,; if he expects that the prospective employee will offer him more value than this salary, he hires the man. He doesn't concern himself with the amount of employment in the economy.
Section II: Here we come to the heart of the general theory, though it is presented sketchily as most terms have not yet been defined--which Keynes readily admits. We'll take a look at his list of points one by one:
1) In a given situation of technique, resources and costs, income (both money-income and real income) depends on the volume of employment N.
So long as we remember that N is made up individuals, and therefore, aggregation is of limited utility, I see nothing wrong here.
(2) The relationship between the community’s income and what it can be expected to spend on consumption, designated by D1, will depend on the psychological characteristic of the community, which we shall call its propensity to consume. That is to say, consumption will depend on the level of aggregate income and, therefore, on the level of employment N, except when there is some change in the propensity to consume.
Again, Keynes is aggregating. The propensity to consume--which could just as easily have been called the propensity to save, as the relationship is precisely inverse--is a characteristic of an individual. Hence, despite the fact that Americans are up to their eyeballs in debt, our father is a notorious cheapskate. Also, the propensity to consume varies widely, even among individuals. There is nothing to prevent Scrooge from collecting his horde of gold coins to buy a Christmas goose for Bob Crachit.
(3) The amount of labour N which the entrepreneurs decide to employ depends on the sum (D) of two quantities, namely D1, the amount which the community is expected to spend on consumption, and D2, the amount which it is expected to devote to new investment. D is what we have called above the effective demand.
This one is a bit strange. I guess Keynes is saying that entrepreneurs depend on a certain amount of investment--so as to borrow funds to produce capital goods--and a certain amount of consumption--so as to purchase consumer goods. But the individual entrepreneur is less concerned with this ratio than is with whether or not he can sell his product. Apple isn't worried that Americans are tightening their belts; they're confident that the various iThings will sell.
(4) Since D1 + D2 = D = φ(N), where φ is the aggregate supply function, and since, as we have seen in (2) above, D1 is a function of N, which we may write χ(N), depending on the propensity to consume, it follows that φ(N) - χ(N) = D2.
Substitutions don't work if you're not dealing with actual equalities. Since these are relationships, but not explicit function, they cannot be combined mathematically. The Greek letters he uses, seemingly at random, only adds the confusion.
(5) Hence the volume of employment in equilibrium depends on (i) the aggregate supply function, φ, (ii) the propensity to consume, χ, and (iii) the volume of investment, D2. This is the essence of the General Theory of Employment.
Hopefully he states this more explicitly later, because I can't get myself to remember what the the Greek letters are supposed to represent.
(6) For every value of N there is a corresponding marginal productivity of labour in the wage-goods industries; and it is this which determines the real wage. (5) is, therefore, subject to the condition that N cannot exceed the value which reduces the real wage to equality with the marginal disutility of labour. This means that not all changes in D are compatible with our temporary assumption that money-wages are constant. Thus it will be essential to a full statement of our theory to dispense with this assumption.
Again, each individual decides if a change in D requires him to alter his employment status. We'll see what happens when he gets into the changes in money-wages.
(7) On the classical theory, according to which D = φ(N) for all values of N, the volume of employment is in neutral equilibrium for all values of N less than its maximum value; so that the forces of competition between entrepreneurs may be expected to push it to this maximum value. Only at this point, on the classical theory, can there be stable equilibrium.
I'm not sure what Keynes means by "neutral equilibrium". If N does not square with full employment--setting aside those voluntarily unemployed, for n less than N--we are not in a state of equilibrium at all.
(8) When employment increases, D1 will increase, but not by so much as D; since when our income increases our consumption increases also, but not by so much. The key to our practical problem is to be found in this psychological law. For it follows from this that the greater the volume of employment the greater will be the gap between the aggregate supply price (Z) of the corresponding output and the sum (D1) which the entrepreneurs can expect to get back out of the expenditure of consumers. Hence, if there is no change in the propensity to consume, employment cannot increase, unless at the same time D2 is increasing so as to fill the increasing gap between Z and D1. Thus — except on the special assumptions of the classical theory according to which there is some force in operation which, when employment increases, always causes D2 to increase sufficiently to fill the widening gap between Z and D1 — the economic system may find itself in stable equilibrium with N at a level below full employment, namely at the level given by the intersection of the aggregate demand function with the aggregate supply function.
The psychological law which Keynes observes sounds right, but it is not binding, and it is therefore not a law. It might seem reasonable that if I get a raise, I won't go out and spend all of it, but there is nothing to prevent me from doing so. I can, in fact, take the raise and spend that amount plus some of my savings--though if I was a good Keynesian, I'm not sure how much savings I would have. Hence anything which depends on this "law" holding true at all times will go awry should individuals not conform their behavior with the so-called law.
Regarding Keynes conclusion, it would be useful to attack the problem from a different direction. I'm not certain this could be done praxeologically, but at least theoretically, one could demonstrate that, despite a variance of savings rate--i.e. the propensity to consume--different rates of employment are possible. This seems to be the big take away here: if the propensity to consume isn't high enough--or low enough?--unemployment will result. I can't seem to find what that rate should be, so if you could point that out, I'd be grateful.
Section III: The rhetoric in this section is scurrilous. I've commented before on how poorly written the General Theory has been, but here, Keynes shines. He doesn't so much offer an argument, however, so I'll end my summary here.
This is arguably the most important chapter in the book, so please point out anything you think I may have missed or glossed over.
Thursday, September 30, 2010
Monday, September 27, 2010
Keynes - The General Theory - Chapter II - Sections III - VII
Section III: Keynes begins this section with a discussion surrounding the differences between a reduction of money-wages, and a reduction of real wages, "due to a change in the purchasing power of money which affects all workers alike." Keynes claims that although every other element in economics - such as prices - are set in real terms, people only care about money wages. It is quite a stretch for him to claim that unions and workers will accept falling real wages in the form of rising prices, as long as money wages remain the same. If this were the case, why do unions ask for raises to keep pace with inflation, and why does government grant its own employees a raise to compensate rising prices?
Section IV: Keynes uses this chapter to define involuntary unemployment. He writes, "Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relative to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment." At best, this describes frictional unemployment. If, as Keynes claims, the aggregate supply and the aggregate demand would be greater than the current condition the excess demand will employ the extra supply. Keynes' "problem" of involuntary unemployment is at worst a short-run case.
He goes on to argue that if the classical theory only applies to full unemployment, "it is fallacious to apply it to the problems of involuntary unemployment - if there be such a thing (and who will deny it?)" Considering Keynes wrote this during the Great Depression I doubt many of the thousands of unemployed would deny it, but that does not make it correct. Rather than making a case for involuntary unemployment, and arguing it against the classical theory, Keynes would rather appeal to people's emotions.
Section V: Keynes continues his discussion of wages and employment in this section. He argues that with a given organization, equipment, and technique, real wages and the volume of output are correlated. From this correlation he claims, "an increase in employment can only occur to the accompaniment of a decline on the rate of real wages." He continues, "if employment increases, then, in the short period, the reward per unit of labour in terms of wage-goods must, in general, decline and profits increase." This is not necessarily true, for if an entrepreneur increases employment he will pay the new workers according to the output he expects them to contribute. If he is wrong, and the worker contributes less than he believed, the entrepreneur will experience losses. One must not forget that employment is a voluntary agreement among two parties, and the only law governing their wage is each parties individual value scale.
Keynes ends this section with a claim that is essential to his theory, "a willingness on the part of labour to accept lower money-wages is not necessarily a remedy for unemployment." This is the basis for the Keynesian belief that the government must intervene via inflation to stop involuntary unemployment. Yet, inflation affects the entire economy, including prices, while allowing flexible wage rates only affects certain sectors of the economy. Surely, it is more efficient and less distortive to allow wages to fall and clear the market for a particular labor factor than to inflate prices throughout the economy.
Section VI: In this section Keynes tackles the classical theorists belief that supply creates its own demand. He quotes from both J.S. Mill and Marshall, but one point from Marshall is of particular importance, "He is said to spend when he seeks to obtain present enjoyment from the services and commodities of his which he purchases. He is said to save when he causes the labour and the commodities which he purchases to be devoted to the production of wealth from which he expects to derive the means of enjoyment in the future." This is consistent with the Austrian view that all economic activity revolves around satisfying the desires of the consumer; either now or in the future. Keynes disagrees with this belief, and claims that there is no link between decisions to abstain from present consumption and decisions to provide for future consumption. Unfortunately for Keynes, time preference clearly provides the link between present and future consumption decisions.
Section VII: In the final section of this chapter, Keynes outlines the three assumptions of the classical theory that he has purportedly refuted.
Section IV: Keynes uses this chapter to define involuntary unemployment. He writes, "Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relative to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment." At best, this describes frictional unemployment. If, as Keynes claims, the aggregate supply and the aggregate demand would be greater than the current condition the excess demand will employ the extra supply. Keynes' "problem" of involuntary unemployment is at worst a short-run case.
He goes on to argue that if the classical theory only applies to full unemployment, "it is fallacious to apply it to the problems of involuntary unemployment - if there be such a thing (and who will deny it?)" Considering Keynes wrote this during the Great Depression I doubt many of the thousands of unemployed would deny it, but that does not make it correct. Rather than making a case for involuntary unemployment, and arguing it against the classical theory, Keynes would rather appeal to people's emotions.
Section V: Keynes continues his discussion of wages and employment in this section. He argues that with a given organization, equipment, and technique, real wages and the volume of output are correlated. From this correlation he claims, "an increase in employment can only occur to the accompaniment of a decline on the rate of real wages." He continues, "if employment increases, then, in the short period, the reward per unit of labour in terms of wage-goods must, in general, decline and profits increase." This is not necessarily true, for if an entrepreneur increases employment he will pay the new workers according to the output he expects them to contribute. If he is wrong, and the worker contributes less than he believed, the entrepreneur will experience losses. One must not forget that employment is a voluntary agreement among two parties, and the only law governing their wage is each parties individual value scale.
Keynes ends this section with a claim that is essential to his theory, "a willingness on the part of labour to accept lower money-wages is not necessarily a remedy for unemployment." This is the basis for the Keynesian belief that the government must intervene via inflation to stop involuntary unemployment. Yet, inflation affects the entire economy, including prices, while allowing flexible wage rates only affects certain sectors of the economy. Surely, it is more efficient and less distortive to allow wages to fall and clear the market for a particular labor factor than to inflate prices throughout the economy.
Section VI: In this section Keynes tackles the classical theorists belief that supply creates its own demand. He quotes from both J.S. Mill and Marshall, but one point from Marshall is of particular importance, "He is said to spend when he seeks to obtain present enjoyment from the services and commodities of his which he purchases. He is said to save when he causes the labour and the commodities which he purchases to be devoted to the production of wealth from which he expects to derive the means of enjoyment in the future." This is consistent with the Austrian view that all economic activity revolves around satisfying the desires of the consumer; either now or in the future. Keynes disagrees with this belief, and claims that there is no link between decisions to abstain from present consumption and decisions to provide for future consumption. Unfortunately for Keynes, time preference clearly provides the link between present and future consumption decisions.
Section VII: In the final section of this chapter, Keynes outlines the three assumptions of the classical theory that he has purportedly refuted.
Wednesday, September 22, 2010
Keynes - The General Theory - Chapter II - Sections I and II
Section I: Keynes starts the second chapter thus: "Most treatises on the theory of value and production are primarily concerned with the distribution of a given volume of employed resources between different uses and with the conditions which, assuming the employment of this quantity of resources, determine their relative rewards and the relative values of their products."
I'm not terribly familiar with the literature, but there are reasons to believe that this statement is not true. Whatever Keynes's ability as an economist, he often speaks as if he has a deep familiarity with divergent economic thought even when it is not the case. The problem is a real one, which is why Keynes was not the first to address it.
Continuing, Keynes gives two postulates upon which is based the "classical theory of employment." To wit:
1) The wage is equal to the marginal product of labour
My research tells me that this first postulate is an accurate summary of the classical position. However, this is not consistent with Austrian teaching, under which the wage is that which is agreed upon by the employer and the employee. There is no real equality; instead, the employee works for a wage which he prefers--both to other wage offers as well as the prospect of remaining idle--while the employer pays this wage because he prefers dispensing with this money in exchange for which he expects certain work from his employee.
The explanation offered by Keynes serves only to muddy the waters.
Onto the second postulate:
2) The utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment
I'm honestly not sure what this means or why Keynes thought it was necessary. If you've defined your equality above, I'm not sure what this second postulate gives you. I may be missing something here.
Keynes uses a trichotomy to classify unemployment: frictional, voluntary, and involuntary. Yet frictional unemployment can be either, so I don't think it's a very helpful distinction. Nonetheless, Keynes proposes to look into involuntary employment and how it may come about.
He uses some more unhelpful terminology in this section by dividing goods into wage-goods and non-wage-goods. I can't think of any non-wage-goods. Further research suggests that by wage-goods, Keynes means consumer goods. I'm not sure why he felt need to introduce strange terminology--though in fairness these terms come from Pigou.
Section II: Keynes postulates: "that within a certain range the demand of labour is for a minimum money-wage and not for a minimum real wage." This is interesting, but not surprising. I'm certain a fair number of employees would accept a pay cut if they could find no other work; this number would be more substantial without generous unemployment benefits. When this wage reduction occurs clandestinely through inflation--for this is the primary cause of a reduction in real wages--it makes sense that people would tolerate this as well. There is a point at which people will seek employment elsewhere or cease working entirely; but it is not one penny less per hour as Keynes seems to think classical economists thought.
Keynes tells us: "It is not very plausible to assert that unemployment in the United States in 1932 was due either to labour obstinately refusing to accept a reduction of money-wages or to its obstinately demanding a real wage beyond what the productivity of the economic machine was capable of furnishing." Unfortunately, he does not tell us why it is implausible. Murray Rothbard makes a good case in his book, America's Great Depression, that the refusal of the partnership of big business and government to let wages fall exacerbated the depression. It would certainly seem reasonable to argue that allowing wages to fall would have created more employment.
He also writes: "It would be interesting to see the results of a statistical enquiry into the actual relationship between changes in money-wages and changes in real wages." His argument is empirical, so it would behoove him to take the time to accumulate some data, so as to see if his theory is reasonable. Keynes fails to do the necessary research here.
Continuing: "The traditional theory maintains, in short, that the wage bargains between the entrepreneurs and the workers determine the real wage ; so that, assuming free competition amongst employers and no restrictive combination amongst workers, the latter can, if they wish, bring their real wages into conformity with the marginal disutility of the amount of employment offered by the employers at that wage." Note the italics. Barring interference from the State--as for instance, raising the minimum wage would disallow laborers from working for less than the minimum--this is sound.
Then Keynes starts to get muddled by looking at the forest and forgetting that it is comprised of trees: "The classical conclusions are intended, it must be remembered, to apply to the whole body of labour and do not mean merely that a single individual can get employment by accepting a cut in money-wages which his fellows refuse." There is no such law which applies to the body of labor. All action occurs with individuals, and, to be more specific, at the margins. Employers do not say, "we shall raise employment by some quantity today" but rather ask, "shall we hire this person?" It is foolish to speak otherwise.
More: "To sum up: there are two objections to the second postulate of the classical theory." We have explained the problems with the first, so we'll move to the second: "There may exist no expedient by which labour as a whole can reduce its real wage to a given figure by making revised money bargains with the entrepreneurs. This will be our contention." Again, labor does not act as a whole. Individual laborers may seek alternative employment should a change in conditions prove undesirable to them. I don't see how this can be disputed.
I'm not terribly familiar with the literature, but there are reasons to believe that this statement is not true. Whatever Keynes's ability as an economist, he often speaks as if he has a deep familiarity with divergent economic thought even when it is not the case. The problem is a real one, which is why Keynes was not the first to address it.
Continuing, Keynes gives two postulates upon which is based the "classical theory of employment." To wit:
1) The wage is equal to the marginal product of labour
My research tells me that this first postulate is an accurate summary of the classical position. However, this is not consistent with Austrian teaching, under which the wage is that which is agreed upon by the employer and the employee. There is no real equality; instead, the employee works for a wage which he prefers--both to other wage offers as well as the prospect of remaining idle--while the employer pays this wage because he prefers dispensing with this money in exchange for which he expects certain work from his employee.
The explanation offered by Keynes serves only to muddy the waters.
Onto the second postulate:
2) The utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment
I'm honestly not sure what this means or why Keynes thought it was necessary. If you've defined your equality above, I'm not sure what this second postulate gives you. I may be missing something here.
Keynes uses a trichotomy to classify unemployment: frictional, voluntary, and involuntary. Yet frictional unemployment can be either, so I don't think it's a very helpful distinction. Nonetheless, Keynes proposes to look into involuntary employment and how it may come about.
He uses some more unhelpful terminology in this section by dividing goods into wage-goods and non-wage-goods. I can't think of any non-wage-goods. Further research suggests that by wage-goods, Keynes means consumer goods. I'm not sure why he felt need to introduce strange terminology--though in fairness these terms come from Pigou.
Section II: Keynes postulates: "that within a certain range the demand of labour is for a minimum money-wage and not for a minimum real wage." This is interesting, but not surprising. I'm certain a fair number of employees would accept a pay cut if they could find no other work; this number would be more substantial without generous unemployment benefits. When this wage reduction occurs clandestinely through inflation--for this is the primary cause of a reduction in real wages--it makes sense that people would tolerate this as well. There is a point at which people will seek employment elsewhere or cease working entirely; but it is not one penny less per hour as Keynes seems to think classical economists thought.
Keynes tells us: "It is not very plausible to assert that unemployment in the United States in 1932 was due either to labour obstinately refusing to accept a reduction of money-wages or to its obstinately demanding a real wage beyond what the productivity of the economic machine was capable of furnishing." Unfortunately, he does not tell us why it is implausible. Murray Rothbard makes a good case in his book, America's Great Depression, that the refusal of the partnership of big business and government to let wages fall exacerbated the depression. It would certainly seem reasonable to argue that allowing wages to fall would have created more employment.
He also writes: "It would be interesting to see the results of a statistical enquiry into the actual relationship between changes in money-wages and changes in real wages." His argument is empirical, so it would behoove him to take the time to accumulate some data, so as to see if his theory is reasonable. Keynes fails to do the necessary research here.
Continuing: "The traditional theory maintains, in short, that the wage bargains between the entrepreneurs and the workers determine the real wage ; so that, assuming free competition amongst employers and no restrictive combination amongst workers, the latter can, if they wish, bring their real wages into conformity with the marginal disutility of the amount of employment offered by the employers at that wage." Note the italics. Barring interference from the State--as for instance, raising the minimum wage would disallow laborers from working for less than the minimum--this is sound.
Then Keynes starts to get muddled by looking at the forest and forgetting that it is comprised of trees: "The classical conclusions are intended, it must be remembered, to apply to the whole body of labour and do not mean merely that a single individual can get employment by accepting a cut in money-wages which his fellows refuse." There is no such law which applies to the body of labor. All action occurs with individuals, and, to be more specific, at the margins. Employers do not say, "we shall raise employment by some quantity today" but rather ask, "shall we hire this person?" It is foolish to speak otherwise.
More: "To sum up: there are two objections to the second postulate of the classical theory." We have explained the problems with the first, so we'll move to the second: "There may exist no expedient by which labour as a whole can reduce its real wage to a given figure by making revised money bargains with the entrepreneurs. This will be our contention." Again, labor does not act as a whole. Individual laborers may seek alternative employment should a change in conditions prove undesirable to them. I don't see how this can be disputed.
Monday, September 20, 2010
Keynes - The General Theory - Chapter I
So we begin: "I have called this book the General Theory of Employment, Interest and Money , placing the emphasis on the prefix general." One of the criticisms of Keynes is that he paid too much attention to the Great Depression in writing A General Theory. Obviously an economist writing when Keynes did would have the latest recession firmly in mind, but by his own standard, we should be able to find, in his theory, a policy recommendation--even if that recommendation is to do nothing--for any situation which could confront those with monetary authority. If we can't find this, his theory is not general at all.
In a footnote, Keynes defines classical as it regards economics: "'The classical economists' was a name invented by Marx to cover Ricardo and James Mill and their predecessors, that is to say for the founders of the theory which culminated in the Ricardian economics. I have become accustomed, perhaps perpetrating a solecism, to include in 'the classical school' the followers of Ricardo, those, that is to say, who adopted and perfected the theory of the Ricardian economics, including (for example) J. S. Mill, Marshall, Edgeworth and Prof. Pigou."
I'm too ignorant to comment on the prudence of lumping all of these men together. Certainly Keynes was aware of differences of opinion among economists--he comments on them in the Preface. Still, the biggest oversight here might be in leaving out other schools; Mises was forgotten by his point, but are Schumpeter and Hayek--the latter of whom was well known by Keynes--to be thrown in with Marshall et. al.? Hayek's name appears in the index, so I suppose we shall see.
He continues: "I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium." This is clumsily worded. He seems to be saying that the classical theory only deals with the economy as it exists in equilibrium--or, weaker yet, only a subset of this. I'm not sure what "the possible positions of equilibrium" could be.
More from Keynes: "Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience." In other words, equilibrium is a theoretical construction; in the real world, the economy is always moving toward of falling away from equilibrium, a point it never reaches because it is always changing.
In a footnote, Keynes defines classical as it regards economics: "'The classical economists' was a name invented by Marx to cover Ricardo and James Mill and their predecessors, that is to say for the founders of the theory which culminated in the Ricardian economics. I have become accustomed, perhaps perpetrating a solecism, to include in 'the classical school' the followers of Ricardo, those, that is to say, who adopted and perfected the theory of the Ricardian economics, including (for example) J. S. Mill, Marshall, Edgeworth and Prof. Pigou."
I'm too ignorant to comment on the prudence of lumping all of these men together. Certainly Keynes was aware of differences of opinion among economists--he comments on them in the Preface. Still, the biggest oversight here might be in leaving out other schools; Mises was forgotten by his point, but are Schumpeter and Hayek--the latter of whom was well known by Keynes--to be thrown in with Marshall et. al.? Hayek's name appears in the index, so I suppose we shall see.
He continues: "I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium." This is clumsily worded. He seems to be saying that the classical theory only deals with the economy as it exists in equilibrium--or, weaker yet, only a subset of this. I'm not sure what "the possible positions of equilibrium" could be.
More from Keynes: "Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience." In other words, equilibrium is a theoretical construction; in the real world, the economy is always moving toward of falling away from equilibrium, a point it never reaches because it is always changing.
Keynes - The General Theory - Preface
Keynes tells us that, while he hopes the book "will be intelligible to others", his audience is his "fellow economists". (p. v) He is going to expose the fault with "orthodox economics"--the term is not defined; presumably he is referring to Alfred Marshall, the professor who taught the only economics class Keynes ever took. Specifically, he refers to "a lack of clearness and of generality in the premises." Whether or not his predecessors were at fault for these reasons, we have a measure by which to judge The General Theory. Rethinking the premises which led those who subscribe to "the classical theory"--also not defined--will entail "highly abstract argument and much controversy."
The second paragraph contains an interesting sentence: "But, if my explanations are right, it is my fellow economists, not the general public, whom I must first convince." If the economists grok his doctrine, they will be able to pitch it to those who run governments; when the beneficent policies have been implemented, the people will then benefit. Keynes is ruling out an attempt to convince the people to behave in a certain manner because his theory is dependent--as we shall see--on the people behaving in a certain way when certain economic conditions are present.
Keynes comments on the relationship between this book and his Treatise on Money. Since I've not read this previous work, its connection to The General Theory is of no interest.
The next paragraph is more interesting: "It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics (along with the other moral sciences), where it is often impossible to bring one's ideas to a conclusive test either formal or experimental" We could make a snide remark here about Keynesianism, but I'm more concerned with whether any conceivable test could be made to prove or disprove his theory. I would, following Ludwig von Mises, posit that no such test could be conceived. But for who do not follow Mises, the massive stimuli enacted by many of the governments throughout the world in 2008 may serve to indicate something about the doctrine of Keynes. One wonders what the man himself would think.
Finally, Keynes claims: "The ideas which are here expressed so laboriously are extremely simple and should be obvious." We shall see.
The second paragraph contains an interesting sentence: "But, if my explanations are right, it is my fellow economists, not the general public, whom I must first convince." If the economists grok his doctrine, they will be able to pitch it to those who run governments; when the beneficent policies have been implemented, the people will then benefit. Keynes is ruling out an attempt to convince the people to behave in a certain manner because his theory is dependent--as we shall see--on the people behaving in a certain way when certain economic conditions are present.
Keynes comments on the relationship between this book and his Treatise on Money. Since I've not read this previous work, its connection to The General Theory is of no interest.
The next paragraph is more interesting: "It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics (along with the other moral sciences), where it is often impossible to bring one's ideas to a conclusive test either formal or experimental" We could make a snide remark here about Keynesianism, but I'm more concerned with whether any conceivable test could be made to prove or disprove his theory. I would, following Ludwig von Mises, posit that no such test could be conceived. But for who do not follow Mises, the massive stimuli enacted by many of the governments throughout the world in 2008 may serve to indicate something about the doctrine of Keynes. One wonders what the man himself would think.
Finally, Keynes claims: "The ideas which are here expressed so laboriously are extremely simple and should be obvious." We shall see.
John Maynard Keynes: The General Theory of Employment, Interest and Money
This post will contain all of the posts my brother Jeff and I put up in our discussion of John Maynard Keynes's The General Theory of Employment, Interest and Money. I'll try to keep the divisions by chapter.
Preface
Chapter I
Chapter II - Sections I and II
Chapter II - Sections III - VII
Chapter III
Chapter IV
Chapter V
Chapter VI
Chapter VII
Chapter VIII
Chapter IX
Chapter X
Chapter XI
Chapter XII
Chapter XIII
Chapter XIV
Chapter XV
Chapter XVI
Chapter XVII
Chapter XVIII
Chapter XIX
Chapter XX
Chapter XXI
Preface
Chapter I
Chapter II - Sections I and II
Chapter II - Sections III - VII
Chapter III
Chapter IV
Chapter V
Chapter VI
Chapter VII
Chapter VIII
Chapter IX
Chapter X
Chapter XI
Chapter XII
Chapter XIII
Chapter XIV
Chapter XV
Chapter XVI
Chapter XVII
Chapter XVIII
Chapter XIX
Chapter XX
Chapter XXI
Sunday, September 19, 2010
Weekly Column - 09/19/2010
This week's column:
"The man being coerced, therefore, always loses in utility as a result of the intervention, for his action has been forcibly changed by its impact.” – Murray Rothbard, Man, Economy, and State
There are few things that are so misunderstood as the free market. The very term conjures up hobgoblins: from robber barons and Dickensian businessmen, to Gordon Gecko and Bernie Madoff.
Yet the free market is nothing more than a system of voluntary exchange. A producer offers a good or a service to consumers; in a primitive economy, the consumer offers a good or a service in return; later, some form of money—historically, it has usually been silver or gold—allows a single good to take the place of an endless series of bartered items. This allowed for greater specialization: rather than having to acquire the good the producer wants, consumers can exchange money with the understanding that the producer can then, as a consumer, offer this good in exchange with another producer. Money allows for greater specialization, but it does not alter the system as one of voluntary exchange.
"The man being coerced, therefore, always loses in utility as a result of the intervention, for his action has been forcibly changed by its impact.” – Murray Rothbard, Man, Economy, and State
There are few things that are so misunderstood as the free market. The very term conjures up hobgoblins: from robber barons and Dickensian businessmen, to Gordon Gecko and Bernie Madoff.
Yet the free market is nothing more than a system of voluntary exchange. A producer offers a good or a service to consumers; in a primitive economy, the consumer offers a good or a service in return; later, some form of money—historically, it has usually been silver or gold—allows a single good to take the place of an endless series of bartered items. This allowed for greater specialization: rather than having to acquire the good the producer wants, consumers can exchange money with the understanding that the producer can then, as a consumer, offer this good in exchange with another producer. Money allows for greater specialization, but it does not alter the system as one of voluntary exchange.
Wednesday, September 15, 2010
Weekly Column - 09/13/2010
This week's column:
"By the command of the sultan, the churches and fortifications of the Latin cities were demolished; a motive of avarice or fear still opened the holy sepulchre to some devout and defenceless pilgrims; and a mournful and solitary silence prevailed along the coast which had so long resounded with the WORLD’S DEBATE." – Edward Gibbon, The Decline and Fall of the Roman Empire
Thus the master historian recounts the Fall of Acre, a pivotal battle in the story of the Kingdom of Jerusalem. While crusading to the Holy Land ceased after Acre’s fall, crusading itself continued. And while Islam retained ascendancy in the Middle East, fighting between its adherents and Christendom proceeded for centuries. The world’s debate was far from over.
Two stories this summer have assured us that the debate rages still. First, there was the issue of the ground zero mosque. As the building was being erected two blocks from the twin towers, and whereas there were already mosques—to say nothing of strip clubs—within a two block radius of ground zero, the fervor seemed far and away over the top. To a libertarian, it’s simply a matter of property rights. The owners of the property should be fit to build as they choose.
"By the command of the sultan, the churches and fortifications of the Latin cities were demolished; a motive of avarice or fear still opened the holy sepulchre to some devout and defenceless pilgrims; and a mournful and solitary silence prevailed along the coast which had so long resounded with the WORLD’S DEBATE." – Edward Gibbon, The Decline and Fall of the Roman Empire
Thus the master historian recounts the Fall of Acre, a pivotal battle in the story of the Kingdom of Jerusalem. While crusading to the Holy Land ceased after Acre’s fall, crusading itself continued. And while Islam retained ascendancy in the Middle East, fighting between its adherents and Christendom proceeded for centuries. The world’s debate was far from over.
Two stories this summer have assured us that the debate rages still. First, there was the issue of the ground zero mosque. As the building was being erected two blocks from the twin towers, and whereas there were already mosques—to say nothing of strip clubs—within a two block radius of ground zero, the fervor seemed far and away over the top. To a libertarian, it’s simply a matter of property rights. The owners of the property should be fit to build as they choose.
Sunday, September 05, 2010
A Collapse Cometh
Becoming an expert on Japanese politics is unlikely to provide a path to fame and influence in America. But writing a book that seemed to predict 9/11 might do the trick. Such has been the road traveled by Chalmers Johnson. In 2000, he wrote a book titled Blowback. The term, which comes from the CIA, encapsulates the unintended consequences of covert action by the government upon its citizens. Johnson focused on the slew of U.S. Military bases in Okinawa, Japan to demonstrate the concept. On September 11, blowback hit the U.S. in spectacular form. Previously unheralded, Johnson's book quickly became a best seller.
There followed two more books in what became known as the Blowback trilogy. Secondly came The Sorrows of Empire, published in 2004. In it, he cataloged the immense empire of bases--perhaps one thousand in number--which the U.S. occupies across well over one hundred nations throughout the world. These bases are not only costly, siphoning American wealth to rich contractors; they also foment hatred of the United States and its policies. In 2007, Nemesis rounded out the trilogy. Johnson argued that the empire threatens, not only our democracy--which is forever waging wars without the consent of the people--but the economic well-being of all Americans. If we do not change our policies, our empire will collapse, leaving the nation mired in bankruptcy.
Like the Hitchhiker's Guide, the Blowback trilogy now has more than three books. Johnson's most recent contribution is Dismantling the Empire: America's Last Best Hope. Despite the title, he leaves the reader feeling offers little by way of hope. Although he concludes by giving the reader "10 steps toward liquidating the empire", other essays supply ample evidence that the problem may prove intractable. Johnson notes that Obama has expanded the war in Afghanistan and spent more on defense in 2010 than Bush did in his last year in power. The economy may be tanking, but the Department of Defense and its legion of dependencies are still living large.
The book breaks little new ground. In fact, only two of the fifteen essays, as well as the introduction, represent previously unpublished material; the rest were written by Johnson during the last several years. Still, his book offers a reasonably complete criticism of the U.S. empire. The Blowback trilogy is well worth reading, but those who do not desire to tackle the entire thing would do well to start with Dismantling the Empire.
The book is divided into five parts, the last of which offers a program for reform. The first part recounts recent American foreign policy misadventures, from the arming of Afghani militants to fight the Soviets, up through the present Iraqi "conflict". We are reminded that, during the latter, armed forces stood by--and even partook--as ancient artifacts were stolen and buildings were pillaged and burned.
The second part examines the CIA and the ever increasing dependence of the Department of Defense on well-paid mercenaries. The Agency's stunning ineptitude is covered thoroughly. Those who believe that the CIA's mission ought to be accomplished will clamor for reform. Johnson, who finds much of the mission itself abhorrent, advocates abolition. In the third part, Johnson gives us an overview of the empire of bases he dealt with in the trilogy's second book.
The fourth part, "the pentagon takes us down" is the most fascinating. The United States spends more money on defense than the rest of the world combined. Tabulating the costs of empire can be difficult, since so much of it is hidden, but "conservatively calculated", the U.S. spent at least 1.1 trillion in fiscal year 2008. Alas, reducing the defense budget requires herculean political effort. Many thousands of Americans are remunerated lucratively by the racket in munitions.
Moreover, because politicians subscribe to what Johnson calls "military Keynesianism", any reduction in defense spending is seen as bad for the economy. The reality is that destructive spending crowds out private sector development; instead of making cars and televisions, the U.S. economy now produces fighter jets and bombs. Once the leader of the world in manufacturing, China is set to pass the U.S. by next year. These numbers obscure a reality which is direr still: "By 1990, the value of the weapons, equipment, and factories devoted to the Department of Defense was 83 percent of the value of all plants and equipment in American manufacturing." The empire wastes valuable resources, contributing only to the national debt.
Johnson is correct in noting that the empire will speed us toward bankruptcy. But he is wrong in insinuating that liquidating it will solve the problem. The debt crisis threatens to destroy much of the western world. Yet only America is cursed with empire. Eliminating this rope around the neck of the republic is a necessary step towards restoring solvency, but it is an insufficient one. When Johnson advises that the money spent on defense could be used to pay for Social Security and schools, he fails to realize that while the empire is doomed, social democracy is also facing an existential crisis.
One other caveat: twice Johnson reveals his support for abortion, once by bemoaning the fact that women who are impregnated while in the service cannot procure abortions on base. At long last, chalk one up for the empire. The world is not a better place because American women soldiers can kill their unborn children just as easily as they can slaughter an Afghani wedding party. An opposition to aggressive violence requires defending human life in all its forms.
The salient point is that, whatever his viewpoints on other topics, Johnson is completely correct when it comes to the empire. Dismantling it is an integral step in the restoration of the republic. Obama has proven that, like his progressive predecessors--Wilson, FDR, LBJ--Democrats can wage war just like Republicans. Chalmers Johnson proves that they can also offer a cogent critique of profligate defense spending. As a fellow enemy of empire, I heartily recommend Johnson's latest book. If the two parties in Washington can unite to keep the wars going, those of divergent ideological backgrounds can set aside our differences to prevent them from doing so.
There followed two more books in what became known as the Blowback trilogy. Secondly came The Sorrows of Empire, published in 2004. In it, he cataloged the immense empire of bases--perhaps one thousand in number--which the U.S. occupies across well over one hundred nations throughout the world. These bases are not only costly, siphoning American wealth to rich contractors; they also foment hatred of the United States and its policies. In 2007, Nemesis rounded out the trilogy. Johnson argued that the empire threatens, not only our democracy--which is forever waging wars without the consent of the people--but the economic well-being of all Americans. If we do not change our policies, our empire will collapse, leaving the nation mired in bankruptcy.
Like the Hitchhiker's Guide, the Blowback trilogy now has more than three books. Johnson's most recent contribution is Dismantling the Empire: America's Last Best Hope. Despite the title, he leaves the reader feeling offers little by way of hope. Although he concludes by giving the reader "10 steps toward liquidating the empire", other essays supply ample evidence that the problem may prove intractable. Johnson notes that Obama has expanded the war in Afghanistan and spent more on defense in 2010 than Bush did in his last year in power. The economy may be tanking, but the Department of Defense and its legion of dependencies are still living large.
The book breaks little new ground. In fact, only two of the fifteen essays, as well as the introduction, represent previously unpublished material; the rest were written by Johnson during the last several years. Still, his book offers a reasonably complete criticism of the U.S. empire. The Blowback trilogy is well worth reading, but those who do not desire to tackle the entire thing would do well to start with Dismantling the Empire.
The book is divided into five parts, the last of which offers a program for reform. The first part recounts recent American foreign policy misadventures, from the arming of Afghani militants to fight the Soviets, up through the present Iraqi "conflict". We are reminded that, during the latter, armed forces stood by--and even partook--as ancient artifacts were stolen and buildings were pillaged and burned.
The second part examines the CIA and the ever increasing dependence of the Department of Defense on well-paid mercenaries. The Agency's stunning ineptitude is covered thoroughly. Those who believe that the CIA's mission ought to be accomplished will clamor for reform. Johnson, who finds much of the mission itself abhorrent, advocates abolition. In the third part, Johnson gives us an overview of the empire of bases he dealt with in the trilogy's second book.
The fourth part, "the pentagon takes us down" is the most fascinating. The United States spends more money on defense than the rest of the world combined. Tabulating the costs of empire can be difficult, since so much of it is hidden, but "conservatively calculated", the U.S. spent at least 1.1 trillion in fiscal year 2008. Alas, reducing the defense budget requires herculean political effort. Many thousands of Americans are remunerated lucratively by the racket in munitions.
Moreover, because politicians subscribe to what Johnson calls "military Keynesianism", any reduction in defense spending is seen as bad for the economy. The reality is that destructive spending crowds out private sector development; instead of making cars and televisions, the U.S. economy now produces fighter jets and bombs. Once the leader of the world in manufacturing, China is set to pass the U.S. by next year. These numbers obscure a reality which is direr still: "By 1990, the value of the weapons, equipment, and factories devoted to the Department of Defense was 83 percent of the value of all plants and equipment in American manufacturing." The empire wastes valuable resources, contributing only to the national debt.
Johnson is correct in noting that the empire will speed us toward bankruptcy. But he is wrong in insinuating that liquidating it will solve the problem. The debt crisis threatens to destroy much of the western world. Yet only America is cursed with empire. Eliminating this rope around the neck of the republic is a necessary step towards restoring solvency, but it is an insufficient one. When Johnson advises that the money spent on defense could be used to pay for Social Security and schools, he fails to realize that while the empire is doomed, social democracy is also facing an existential crisis.
One other caveat: twice Johnson reveals his support for abortion, once by bemoaning the fact that women who are impregnated while in the service cannot procure abortions on base. At long last, chalk one up for the empire. The world is not a better place because American women soldiers can kill their unborn children just as easily as they can slaughter an Afghani wedding party. An opposition to aggressive violence requires defending human life in all its forms.
The salient point is that, whatever his viewpoints on other topics, Johnson is completely correct when it comes to the empire. Dismantling it is an integral step in the restoration of the republic. Obama has proven that, like his progressive predecessors--Wilson, FDR, LBJ--Democrats can wage war just like Republicans. Chalmers Johnson proves that they can also offer a cogent critique of profligate defense spending. As a fellow enemy of empire, I heartily recommend Johnson's latest book. If the two parties in Washington can unite to keep the wars going, those of divergent ideological backgrounds can set aside our differences to prevent them from doing so.
UPDATE: The link to the original column now being a dead one, I have placed the entire text of my review above.
Saturday, September 04, 2010
Voting as a Catholic
If you listen closely, you can hear the steady drums begin to beat. Listen very carefully, and the drums give way to a steady, mindless chant: "Vote for Republicans in November. Most important election ever." We are always told this.
Yet even aside from the unlikelihood that supporting the lesser-evil party will do anything to achieve conservative goals--whatever they are--there are serious ethical concerns which prohibit Catholics from voting for most politicians in 2010 America.
Courtesy of Ryan W. McMaken over at the LRC blog, fellow Catholic Mark Shea captures this point well:
I have abandoned the game of supporting candidates who advertise themselves as “30% less evil than the other leading brand.” I will not support candidates of any stripe who ask me to support intrinsic grave evil. Please don’t tell me that’s expecting perfection. It’s not. It’s a bare minimum request for least common denominator civic decency. I don’t ask perfection of either GOP or Dem. I simply ask that they stop telling me I have to support policies which Catholic moral teaching describes as “worthy of the fires of hell”. Both parties do this in various ways, therefore I will not support any candidate from either party that does. Conversely, if any candidate from either party tells me he will not be supporting grave and intrinsic evil, I will at least consider voting for him. So far, the pickings are slim.
Now, this doesn't alter my position that voting itself is of highly problematic nature. (The columns I wrote for the Lode on the matter have disappeared; if I find them, I'll try to add the links.) Anyway, Shea offers the minimum for the Catholic who believes participation in democracy is morally desirous.
It might be an amusing exercise to see how many politicians meet this criteria, but we'll save that for another day.
Yet even aside from the unlikelihood that supporting the lesser-evil party will do anything to achieve conservative goals--whatever they are--there are serious ethical concerns which prohibit Catholics from voting for most politicians in 2010 America.
Courtesy of Ryan W. McMaken over at the LRC blog, fellow Catholic Mark Shea captures this point well:
I have abandoned the game of supporting candidates who advertise themselves as “30% less evil than the other leading brand.” I will not support candidates of any stripe who ask me to support intrinsic grave evil. Please don’t tell me that’s expecting perfection. It’s not. It’s a bare minimum request for least common denominator civic decency. I don’t ask perfection of either GOP or Dem. I simply ask that they stop telling me I have to support policies which Catholic moral teaching describes as “worthy of the fires of hell”. Both parties do this in various ways, therefore I will not support any candidate from either party that does. Conversely, if any candidate from either party tells me he will not be supporting grave and intrinsic evil, I will at least consider voting for him. So far, the pickings are slim.
Now, this doesn't alter my position that voting itself is of highly problematic nature. (The columns I wrote for the Lode on the matter have disappeared; if I find them, I'll try to add the links.) Anyway, Shea offers the minimum for the Catholic who believes participation in democracy is morally desirous.
It might be an amusing exercise to see how many politicians meet this criteria, but we'll save that for another day.
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