It is probably not in the interest of maintaining a reputation for manliest to admit that one is a Jane Austen fan. Then again, one would first need a reputation to diminish.
The criticisms are well-known: she writes about the same subject--marriage--and the same group of people, traveling within the same narrow social circle. These strike me as uncharitable. There is only one Shakespeare, whose imagination could transcend the narrow range of circumstances with which he was familiar. Austen was well aware of her limitations; she wrote beautifully based on what she knew. We cannot be sure she would have written so well had she attempted something outside of her purview.
Like any good novelist, Austen tells the truth. Certain of her characters may lose sense in looking at love and marriage, yet the writer never does. We might expect an unmarried woman--for Austen never married--to be bitter about the institution; alternatively, she might be disdainful over something which she considered beneath her. We find neither. She heartily defends marriage, not through exhaustive asides, but through the characters in her stories.
In The Age of Napoleon Will and Ariel Durant observe, "She perceives that the basic aspect of life is the conscription of the individual into the service of the race; that the crises of government, the conflicts of power, even the cries for social justice are not as fundamental as the repeated, unconscious effort of youth to mature and be used and consumed." (p. 412)
If we use this quote to examine how well our current culture is faring when it comes to the basic aspect of life, we can only conclude that we are doing very badly. This has been a near constant theme of this blog, but I wish to set aside the usual pronouncements of demographic doom to look closer at marriage with the assistance of Miss Austen.
Austen's ideal is clearly love and a good marriage. The former we are to understand as more than a fleeting passion, while the latter comprises a good home and a considerable income so that the wife would not be forced to work. This antipathy toward labor did not stem from laziness or decadence; on the contrary, Austen was Aristotelian in her ethical conception: a certain amount of financial security was required to provide the leisure which made a life of virtue possible. It is true that Austen's characters tend to be fond of balls. But these are irregular and therefore important; they are in full accordance of her conception of the virtuous life.
Unless we are extraordinarily wealthy, this idea is totally foreign to us. For all I know it may be foreign even to them, but it is at least possible for the very rich to live the virtuous life as Austen sees it. The poor can obviously take no part in this vision. Stranger, perhaps, is that the middle class is similarly ill disposed to live thus. Or rather, it would take a radical transformation of habit and behavior to make this a possibility.
While there are some exceptions, for the vast majority of middle class women, the primary objective is not to marry well, but rather to go off to college to obtain a degree so as to obtain a career. At some later point, marriage becomes the desired goal. Yet even if women wished to pursue Austen's route of virtue, it would be virtually impossible to do this, first, because these women still want their careers; and second, because, for all that has changed in the last two hundred years, it's still much more difficult for an aging woman to land a man who possesses the requisite wealth and status. He'd just as soon marry her younger sister.
Austen understood this. While the goal of her female characters is to maintain an ideal marriage, the sensible ones express awareness that the ideal may not come to pass. Since she's sees life as comedic, we don't see her characters end unhappily--this is true of the novels I've read; it may not be true for all of them--but that this possibility exists there can be no doubt.
The idea that men will marry younger women is so well grounded that only a rabid feminist could dispute it. But there is something undeniably cold about facts expressed bluntly. Like any modern heresy, feminism denied the existence of scarcity, and hence, opportunity cost. It preached that one could go to school, have a career, and marry the man of one's dreams--who just happens to be rich. There is no special program to follow; simply follow one's heart and all will work out in the end. This is nonsense, of course. Setting aside years of one's life to attend school and start a career has a real cost; during that time, one cannot be finding a husband. True, one can have a career and a husband, but even this will necessitate some sacrifice, for one or the other goals. Frequently, it seems that the husband finding is put off until later, an excellent illustration of the concept of opportunity cost.
It's true that the cost exists for men, too, but it runs in the other direction. Eight years ago I was a nerd who fiddled with a computer and read too many books. Now I'm a software engineer who still reads too many books but drives a nicer car. The investment in a college education was, for me, a good one--both economically and otherwise. If marriage is not in my near future, my prospects haven't been lowered due to the experience.
It would be false if I insisted that I am viewing this issue dispassionately. While it's true that the sorry state of marriage presents a large problem for society at large, this particular issue effects me at a personal level. Like Austen, I am a defender of marriage as an institution. Unlike Austen, I live at a time when the benefits of marriage are becoming much less clear, at least as far as the man is considered.
For the novelist, it was clear that marriage has the potential to bring the woman a great deal of good. Unhappy marriages were distinctly possible, but divorce was unthinkable, for a variety of reasons, one of which was that even the least propitious of unions still brought the woman some good. (We set aside instances of outright violence; no one credibly claims that the fifty percent divorce rate is due to an epidemic of spousal abuse. )There was also the fact that the woman gave her assent, and therefore bound herself--a notion increasingly alien in our culture of no fault divorce.
The benefits for men were similarly clear. But in this respect we've seen tumultuous changes since Austen's time. Setting aside the comparative qualities of the modern American female, the institution itself has been altered. The marriage is more likely to end in divorce, most initiations of which begin with the woman. The man is thence taken to be raked over the coals, courtesy of the family courts. He is to continue to slave away for his children, without being able to see them when he wishes.
Of course, this isn't the fate of all men. But it does happen, and has been happening at a disconcerting rate; wounded men have begun cropped up on the Internet, counseling younger men to avoid marriage. There are a large number of blogs devoted to the topic of guiding men through the pitfalls of marriage, chiefly through game and avoidance. This phenomenon is too large to be ignored. If the solutions offered fail to satisfy, they nonetheless reveal a deep problem with relations between the sexes.
As a proponent of marriage, I find this trend alarming. If men refuse to marry, society is well nigh doomed. But it is preposterous to simply blame men for not wanting to commit. Until the institution itself is reformed, it is perfectly rational to be suspicious of the raw deal modern marriage offers. As a traditional Catholic, the risk is lowered--traditional Catholics don't believe in divorce. So long as I marry within the fold, so to speak, marriage remains an option; but it is a concern even for me.
It is far from clear if Austen would still wield her pen as a defender of marriage were she alive and writing today. I have my doubts.
Wednesday, December 15, 2010
Tuesday, December 14, 2010
Weekly Column - 12/14/2010
This week's column was deemed publishable:
"In a society where truth becomes treason, we are in big trouble." – Congressman Ron Paul
It is a common misconception that there is little difference between the conservative and the libertarian. While the former is critical of some aspects of government, only the latter is consistent in wishing the State to be severely limited. Conservatives are on solid ground when they criticize the government for its inefficiencies and its propensity to violate the rights of the citizenry. But when it comes to the military, for some reason, these principles—if we can stretch the term to include something which is abandoned so readily—are renounced in favor of a fervent defense of all things Empire.
The latest incident involves Julian Assange, editor of WikiLeaks. Assange has released about 900 formerly secret cables—the 250,000 number which is being reported is false as the rest of the cables are encrypted, and therefore unreadable—which paint a sordid picture of the inner-workings of the American government. Many of the cables are still encrypted, and the sheer enormity of the material has made it difficult to cull the documents for details—though Antiwar.com and Glenn Greenwald, have been doing good work on this front. Nonetheless, conservatives are up in arms over the revelations, which allegedly hurts the mission of "the troops", the sacrosanct symbol of modern conservatism.
"In a society where truth becomes treason, we are in big trouble." – Congressman Ron Paul
It is a common misconception that there is little difference between the conservative and the libertarian. While the former is critical of some aspects of government, only the latter is consistent in wishing the State to be severely limited. Conservatives are on solid ground when they criticize the government for its inefficiencies and its propensity to violate the rights of the citizenry. But when it comes to the military, for some reason, these principles—if we can stretch the term to include something which is abandoned so readily—are renounced in favor of a fervent defense of all things Empire.
The latest incident involves Julian Assange, editor of WikiLeaks. Assange has released about 900 formerly secret cables—the 250,000 number which is being reported is false as the rest of the cables are encrypted, and therefore unreadable—which paint a sordid picture of the inner-workings of the American government. Many of the cables are still encrypted, and the sheer enormity of the material has made it difficult to cull the documents for details—though Antiwar.com and Glenn Greenwald, have been doing good work on this front. Nonetheless, conservatives are up in arms over the revelations, which allegedly hurts the mission of "the troops", the sacrosanct symbol of modern conservatism.
Saturday, December 11, 2010
Keynes - The General Theory - Chapter X
I'm going to say right off the bat that this chapter was pretty confusing. As such, I'd be indebted to anyone who can point out anything I've missed or just plain gotten wrong. Here goes.
Keynes introduces us to his multiplier: "For in given circumstances a definite ratio, to be called the Multiplier, can be established between income and investment and, subject to certain simplifications, between the total employment and the employment directly employed on investment (which we shall call the primary employment)." We'll see shortly that his idea of investment is not what we might suspect by the term, but more on that in a moment.
Section I: Another term is introduced, the marginal propensity to consume, which is defined as: dCw/dYw. Cw is the consumption in terms of wage-units and Yw is income in term of wage units. As usual, Keynes is doing his best to confuse us. All he's saying here is that man spends some percentage of his income; if I make 50 grand a year and I spend 45 grand, then my marginal propensity to consume is 9/10. Actually, as Keynes defines this in terms of wage unit, we cannot even say this much, but Keynes forgets his own definition and treats this propensity as if it were defined in monetary terms, so we can be forgiven the mistake.
From calculus, we know that the d is supposed to represent a rate of change; this is curious because Keynes tells us that "This quantity [the marginal propensity to consume] is of considerable importance, because it tells us how the next increment of output will have to be divided between consumption and investment." Obviously there is no such law. I can increase my propensity to consume by spending my next paycheck at the casino; I could also decrease it.
Using some math, Keynes tells us that: "we can write ΔYw = kΔIw, where 1 - (1/k) is equal to the marginal propensity to consume." He then proceeds: "Let us call k the investment multiplier. 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."
It's not immediately clear what he's done here. As Iw stands for investment, he's simply written the same equation a bit differently. In my previous example, we noted that my marginal propensity to consume is 9/10; using this, as well as the amount of wage units I spend on consumption, we can arrive at my income. Keynes is doing something similar with his multiplier by using the amount of money I invest--5 grand--and, using the multiplier, arriving at my income. The precise importance of the multiplier escapes me. Keynes can do math, but he's a lousy economist.
Not only is the multiplier worthless, it's also essentially arbitrary. Hazlitt points this out in The Failure of the New Economics, but we could make any division we wish and then create a multiplier based on this division. Let us say that I spend 50 a year on socks. The sock multiplier is then 1000. We can now use this fact to stimulate the economy through "investment" in socks by the government.
If the marginal propensity to consume is 1, then the multiplier becomes infinite. If the people in an economy never save at all, it will only be necessary for the government to invest the smallest amount and full employment shall reign. Here again we see Keynes's preposterous hatred of the saver rear its ugly head.
Just what happens when the savings rate becomes negative is anyone's guess. I suppose the multiplier becomes negative and any "investment" undertaken by the government hurts the employment rolls. At last, truth can be extracted from something Keynes has said.
Section III: The multiplier is an idea Keynes took from someone named Kahn. But his multiplier is different as it deals with employment. No matter. Keynes can make the necessary assumption to ensure that these will actually be the same. Whether or not these assumptions are well founded is irrelevant, since the idea of the multiplier is patently absurd.
Keynes writes: "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 multiplier 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, assuming no reduction of investment in other directions." Since the marginal propensity to consume can be measured, we need only use it to find the "multiplier", after which the government knows how much to "invest" to bring the economy to full employment. If our multiplier is 10, and there are 10 million works unemployed, if the government employs the first million, the private sector will pick up the slack for the other nine.
A few points here. First, it's important that Keynes offers no conditions as to what sort of investment need occur. Presumably, full employment can be restored whether the unemployed are set to work digging holes in the ground--and filling them up again--or helping build roads. Only an ignoramus would be concerned with what is being produced; the important thing is to get people up and consuming.
Second, Keynes doesn't tell us whence this investment will come. If the money comes from taxes, this may cause a reduction in the propensity to consume, thereby decreasing the multiplier--according to Keynes. If the money comes from the printing pressed of the central bank, we would expect inflation, although he tells us that: "When full employment is reached, any attempt to increase investment still further will set up a tendency in money-prices to rise without limit, irrespective of the marginal propensity to consume; i.e. we shall have reached a state of true inflation." We'll deal with his definition of inflation later; for now, we note that it can only apply if full employment has been reached; and then it occurs suddenly all at once.
Third, we should be able to verify whether or not this works. And we see that Keynes does try to do this a bit later.
Section III: Keynes clarifies that the multiplier may not always take full effect: "If, therefore, we wish to apply the above without qualification to the effect of (eg.) increased public works, we have to assume that there is no offset through decreased investment in other directions,-and also, of course, no associated change in the propensity of the community to consume." He then goes on the sketch out some of the reasons, but as an implementation of Keynesian policies never seems to produce anything akin to the multiplier effect, I think it clear that government investment causes so many disparate changes in the economy as a whole that we can't possibly list them all. Keynes's theory assumes that government may act in a vacuum, but we know that every economic action undertaken produces innumerable effects on the other economic actors.
Section IV: I don't find anything worthy of especial comment in this section.
Section V: Using the little data available, Keynes can attempt to verify his theory. "Taken in conjunction with estimates of national income these [numbers] suggest, for what they are worth, both a lower figure and a more stable figure for the investment multiplier than I should have expected. If single years are taken in isolation, the results look rather wild. But if they are grouped in pairs, the multiplier seems to have been less than 3 and probably fairly stable in the neighbourhood of 2.5. This suggests a marginal propensity to consume not exceeding 6o to 70 per cent. — a figure quite plausible for the boom, but surprisingly, and, in my judgment, improbably low for the slump." In other words, the marginal propensity to consume has absolutely no relation to employment numbers. Don't think that the inability of the data to confirm his theory would slow Keynes down for a bit. Not in the least.
Section VI: Here we have a rhetorical aside, and a reminder that Keynes can be a clear an engaging writer when he takes the time to do so. Unfortunately, the subject of this section is an attack on gold. Since gold is and has been a valuable commodity for the purposes of economic exchange, I have little doubt that it will continue to be useful to humans for quite awhile, certainly longer than our fiat currency. It shall outlast the influence of Keynes himself.
Keynes introduces us to his multiplier: "For in given circumstances a definite ratio, to be called the Multiplier, can be established between income and investment and, subject to certain simplifications, between the total employment and the employment directly employed on investment (which we shall call the primary employment)." We'll see shortly that his idea of investment is not what we might suspect by the term, but more on that in a moment.
Section I: Another term is introduced, the marginal propensity to consume, which is defined as: dCw/dYw. Cw is the consumption in terms of wage-units and Yw is income in term of wage units. As usual, Keynes is doing his best to confuse us. All he's saying here is that man spends some percentage of his income; if I make 50 grand a year and I spend 45 grand, then my marginal propensity to consume is 9/10. Actually, as Keynes defines this in terms of wage unit, we cannot even say this much, but Keynes forgets his own definition and treats this propensity as if it were defined in monetary terms, so we can be forgiven the mistake.
From calculus, we know that the d is supposed to represent a rate of change; this is curious because Keynes tells us that "This quantity [the marginal propensity to consume] is of considerable importance, because it tells us how the next increment of output will have to be divided between consumption and investment." Obviously there is no such law. I can increase my propensity to consume by spending my next paycheck at the casino; I could also decrease it.
Using some math, Keynes tells us that: "we can write ΔYw = kΔIw, where 1 - (1/k) is equal to the marginal propensity to consume." He then proceeds: "Let us call k the investment multiplier. 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."
It's not immediately clear what he's done here. As Iw stands for investment, he's simply written the same equation a bit differently. In my previous example, we noted that my marginal propensity to consume is 9/10; using this, as well as the amount of wage units I spend on consumption, we can arrive at my income. Keynes is doing something similar with his multiplier by using the amount of money I invest--5 grand--and, using the multiplier, arriving at my income. The precise importance of the multiplier escapes me. Keynes can do math, but he's a lousy economist.
Not only is the multiplier worthless, it's also essentially arbitrary. Hazlitt points this out in The Failure of the New Economics, but we could make any division we wish and then create a multiplier based on this division. Let us say that I spend 50 a year on socks. The sock multiplier is then 1000. We can now use this fact to stimulate the economy through "investment" in socks by the government.
If the marginal propensity to consume is 1, then the multiplier becomes infinite. If the people in an economy never save at all, it will only be necessary for the government to invest the smallest amount and full employment shall reign. Here again we see Keynes's preposterous hatred of the saver rear its ugly head.
Just what happens when the savings rate becomes negative is anyone's guess. I suppose the multiplier becomes negative and any "investment" undertaken by the government hurts the employment rolls. At last, truth can be extracted from something Keynes has said.
Section III: The multiplier is an idea Keynes took from someone named Kahn. But his multiplier is different as it deals with employment. No matter. Keynes can make the necessary assumption to ensure that these will actually be the same. Whether or not these assumptions are well founded is irrelevant, since the idea of the multiplier is patently absurd.
Keynes writes: "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 multiplier 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, assuming no reduction of investment in other directions." Since the marginal propensity to consume can be measured, we need only use it to find the "multiplier", after which the government knows how much to "invest" to bring the economy to full employment. If our multiplier is 10, and there are 10 million works unemployed, if the government employs the first million, the private sector will pick up the slack for the other nine.
A few points here. First, it's important that Keynes offers no conditions as to what sort of investment need occur. Presumably, full employment can be restored whether the unemployed are set to work digging holes in the ground--and filling them up again--or helping build roads. Only an ignoramus would be concerned with what is being produced; the important thing is to get people up and consuming.
Second, Keynes doesn't tell us whence this investment will come. If the money comes from taxes, this may cause a reduction in the propensity to consume, thereby decreasing the multiplier--according to Keynes. If the money comes from the printing pressed of the central bank, we would expect inflation, although he tells us that: "When full employment is reached, any attempt to increase investment still further will set up a tendency in money-prices to rise without limit, irrespective of the marginal propensity to consume; i.e. we shall have reached a state of true inflation." We'll deal with his definition of inflation later; for now, we note that it can only apply if full employment has been reached; and then it occurs suddenly all at once.
Third, we should be able to verify whether or not this works. And we see that Keynes does try to do this a bit later.
Section III: Keynes clarifies that the multiplier may not always take full effect: "If, therefore, we wish to apply the above without qualification to the effect of (eg.) increased public works, we have to assume that there is no offset through decreased investment in other directions,-and also, of course, no associated change in the propensity of the community to consume." He then goes on the sketch out some of the reasons, but as an implementation of Keynesian policies never seems to produce anything akin to the multiplier effect, I think it clear that government investment causes so many disparate changes in the economy as a whole that we can't possibly list them all. Keynes's theory assumes that government may act in a vacuum, but we know that every economic action undertaken produces innumerable effects on the other economic actors.
Section IV: I don't find anything worthy of especial comment in this section.
Section V: Using the little data available, Keynes can attempt to verify his theory. "Taken in conjunction with estimates of national income these [numbers] suggest, for what they are worth, both a lower figure and a more stable figure for the investment multiplier than I should have expected. If single years are taken in isolation, the results look rather wild. But if they are grouped in pairs, the multiplier seems to have been less than 3 and probably fairly stable in the neighbourhood of 2.5. This suggests a marginal propensity to consume not exceeding 6o to 70 per cent. — a figure quite plausible for the boom, but surprisingly, and, in my judgment, improbably low for the slump." In other words, the marginal propensity to consume has absolutely no relation to employment numbers. Don't think that the inability of the data to confirm his theory would slow Keynes down for a bit. Not in the least.
Section VI: Here we have a rhetorical aside, and a reminder that Keynes can be a clear an engaging writer when he takes the time to do so. Unfortunately, the subject of this section is an attack on gold. Since gold is and has been a valuable commodity for the purposes of economic exchange, I have little doubt that it will continue to be useful to humans for quite awhile, certainly longer than our fiat currency. It shall outlast the influence of Keynes himself.
Keynes - The General Theory - Chapter IX
Section I: Having dispensed with the "objective" factors, Keynes moves onto the subjective factors which determine the propensity to consume. He lists eight objects "which lead individuals to refrain from spending out of their incomes":
(i) To build up a reserve against unforeseen contingencies;
(ii) To provide for an anticipated future relation between the income and the needs of the individual or his family different from that which exists in the present, as, for example, in relation to old age, family education, or the maintenance of dependents;
(iii) To enjoy interest and appreciation, i.e. because a larger real consumption at a later date is preferred to a smaller immediate consumption;
(iv) To enjoy a gradually increasing expenditure, since it gratifies a common instinct to look forward to a gradually improving standard of life rather than the contrary, even though the capacity for enjoyment may be diminishing;
(v) To enjoy a sense of independence and the power to do things, though without a clear idea or definite intention of specific action;
(vi) To secure a masse de manoeuvre to carry out speculative or business projects;
(vii) To bequeath a fortune;
(viii) To satisfy pure miserliness, i.e. unreasonable but insistent inhibitions against acts of expenditure as such.
There are two things to note here. First, the list is essentially arbitrary. We could very easily come up with other reasons a man may not spend his money, or we could combine some of the reasons Keynes gives to reduce his list from eight to a more manageable number. Second, Keynes leaves off an important reason, namely that the currency is deflating; by refraining from spending, the consumer hopes to get a better deal in the near future. It's very clear that Keynes frowns upon this sort of behavior, but there are a variety of reasons a man may refrain from spending, many of them quite rational.
He also offers some reasons industry accumulates savings, but I don't see how this this list is of much importance, so I'll skip over it.
However, a bit further down we find this tidbit:
Corresponding to these motives which favour the withholding of a part of income from consumption, there are also operative at times motives which lead to an excess of consumption over income. Several of the motives towards positive saving catalogued above as affecting individuals have their intended counterpart in negative saving at a later date, as, for example, with saving to provide for family needs or old age. Unemployment relief financed by borrowing is best regarded as negative saving.
We can see here an adumbration of Keynes's solution to the unemployment problem. But it's worth noting that while consumption can be greater than income, it can only do so at the cost of savings. When the government cuts checks for the unemployed, if the money came via taxation, the taxpayers are financing this consumption; if the money came via printing by the central bank, anyone who uses the currency finances this consumption through the degradation of the currency brought about by inflation.
In a credit based economy, it may seem as if we can increase consumption beyond income, but this is only apparent. We'll cover this in further detail when we discuss the "multiplier", but the key point is that consumption requires production. It does not matter how much money is doled out for the purposes of consumption, if there have been no goods produced for the consumers to purchase. But more on this later.
Section II: Keynes has not yet given us his definition or theory of interest. This will be covered later in the book. But he does offer us this explanation:
The influence of changes in the rate of interest on the amount actually saved is of paramount importance, but is in the opposite direction to that usually supposed. For even if the attraction of the larger future income to be earned from a higher rate of interest has the effect of diminishing the propensity to consume, nevertheless we can be certain that a rise in the rate of interest will have the effect of reducing the amount actually saved. For aggregate saving is governed by aggregate investment; a rise in the rate of interest (unless it is offset by a corresponding change in the demand-schedule for investment) will diminish investment; hence a rise in the rate of interest must have the effect of reducing incomes to a level at which saving is decreased in the same measure as investment. Since incomes will decrease by a greater absolute amount than investment, it is, indeed, true that, when the rate of interest rises, the rate of consumption will decrease. But this does not mean that there will be a wider margin for saving. On the contrary, saving and spending will both decrease.
Based on this theory, a reduction in the rate of interest would increase both saving and spending, much to the benefit of the economy as a whole. There is a good deal of empirical evidence which suggests that this is absurd, but let us take a theoretical view of interest to determine if Keynes is wrong.
In a free market, the interest rate is determined through borrowers and lenders. The former wish for this rate to be low, while the latter desire that this rate be high. If an economy has many savers, the borrower will have little trouble attaining a low interest rate, as the lenders will compete amongst themselves to secure an interest payment. Contrariwise, if the economy has many borrowers, the savers will be able to attain a higher rate of interest, as the borrowers will have to compete amongst themselves to secure a loan. Thus an increase in savings tends to lower the interest rate, while a decrease in savings tends to raise it, precisely the opposite of what Keynes claims.
Of course, a low interest rate is a signal that now would be a good time to secure a loan; this has the tendency to create borrowers, thereby increasing the interest rate. While the interest rate will naturally fluctuate through the coordination of borrowers and lenders, this doesn't discount the manner in which incentives direct the interest rate.
Since this chapter was short, I will try to put up a post on the next chapter later this weekend.
(i) To build up a reserve against unforeseen contingencies;
(ii) To provide for an anticipated future relation between the income and the needs of the individual or his family different from that which exists in the present, as, for example, in relation to old age, family education, or the maintenance of dependents;
(iii) To enjoy interest and appreciation, i.e. because a larger real consumption at a later date is preferred to a smaller immediate consumption;
(iv) To enjoy a gradually increasing expenditure, since it gratifies a common instinct to look forward to a gradually improving standard of life rather than the contrary, even though the capacity for enjoyment may be diminishing;
(v) To enjoy a sense of independence and the power to do things, though without a clear idea or definite intention of specific action;
(vi) To secure a masse de manoeuvre to carry out speculative or business projects;
(vii) To bequeath a fortune;
(viii) To satisfy pure miserliness, i.e. unreasonable but insistent inhibitions against acts of expenditure as such.
There are two things to note here. First, the list is essentially arbitrary. We could very easily come up with other reasons a man may not spend his money, or we could combine some of the reasons Keynes gives to reduce his list from eight to a more manageable number. Second, Keynes leaves off an important reason, namely that the currency is deflating; by refraining from spending, the consumer hopes to get a better deal in the near future. It's very clear that Keynes frowns upon this sort of behavior, but there are a variety of reasons a man may refrain from spending, many of them quite rational.
He also offers some reasons industry accumulates savings, but I don't see how this this list is of much importance, so I'll skip over it.
However, a bit further down we find this tidbit:
Corresponding to these motives which favour the withholding of a part of income from consumption, there are also operative at times motives which lead to an excess of consumption over income. Several of the motives towards positive saving catalogued above as affecting individuals have their intended counterpart in negative saving at a later date, as, for example, with saving to provide for family needs or old age. Unemployment relief financed by borrowing is best regarded as negative saving.
We can see here an adumbration of Keynes's solution to the unemployment problem. But it's worth noting that while consumption can be greater than income, it can only do so at the cost of savings. When the government cuts checks for the unemployed, if the money came via taxation, the taxpayers are financing this consumption; if the money came via printing by the central bank, anyone who uses the currency finances this consumption through the degradation of the currency brought about by inflation.
In a credit based economy, it may seem as if we can increase consumption beyond income, but this is only apparent. We'll cover this in further detail when we discuss the "multiplier", but the key point is that consumption requires production. It does not matter how much money is doled out for the purposes of consumption, if there have been no goods produced for the consumers to purchase. But more on this later.
Section II: Keynes has not yet given us his definition or theory of interest. This will be covered later in the book. But he does offer us this explanation:
The influence of changes in the rate of interest on the amount actually saved is of paramount importance, but is in the opposite direction to that usually supposed. For even if the attraction of the larger future income to be earned from a higher rate of interest has the effect of diminishing the propensity to consume, nevertheless we can be certain that a rise in the rate of interest will have the effect of reducing the amount actually saved. For aggregate saving is governed by aggregate investment; a rise in the rate of interest (unless it is offset by a corresponding change in the demand-schedule for investment) will diminish investment; hence a rise in the rate of interest must have the effect of reducing incomes to a level at which saving is decreased in the same measure as investment. Since incomes will decrease by a greater absolute amount than investment, it is, indeed, true that, when the rate of interest rises, the rate of consumption will decrease. But this does not mean that there will be a wider margin for saving. On the contrary, saving and spending will both decrease.
Based on this theory, a reduction in the rate of interest would increase both saving and spending, much to the benefit of the economy as a whole. There is a good deal of empirical evidence which suggests that this is absurd, but let us take a theoretical view of interest to determine if Keynes is wrong.
In a free market, the interest rate is determined through borrowers and lenders. The former wish for this rate to be low, while the latter desire that this rate be high. If an economy has many savers, the borrower will have little trouble attaining a low interest rate, as the lenders will compete amongst themselves to secure an interest payment. Contrariwise, if the economy has many borrowers, the savers will be able to attain a higher rate of interest, as the borrowers will have to compete amongst themselves to secure a loan. Thus an increase in savings tends to lower the interest rate, while a decrease in savings tends to raise it, precisely the opposite of what Keynes claims.
Of course, a low interest rate is a signal that now would be a good time to secure a loan; this has the tendency to create borrowers, thereby increasing the interest rate. While the interest rate will naturally fluctuate through the coordination of borrowers and lenders, this doesn't discount the manner in which incentives direct the interest rate.
Since this chapter was short, I will try to put up a post on the next chapter later this weekend.
Tuesday, December 07, 2010
Keynes - The General Theory - Chapter VIII
Chapter VIII is the first of three relating to the propensity to consume. In this chapter Keynes discusses the objective factors which affect the propensity to consume. These factors are as follows:
(I) A change in the wage-unit - Keynes argues that consumption is more a function of real income than of money-income, and because of this changes in the wage unit lead to changes in consumption. He continues that, "we have already allowed for changes in the wage-unit by defining the propensity to consume in terms of income measured in terms of wage-units." Thus, any effect a change in wages has on the propensity to consume has already been imputed in the definition.
(II) A change in the difference between income and net income - It is important to recall Keynes' distinction between income and net income for this section. If we look back to chapter VI, we see that Keynes defines income as the "excess of the value of his finished output sold during the period over his prime cost." Net income - according to Keynes - is the portion of income available for consumption, or income adjusted for the factors outlined in the discussion of chapter VI (i.e. windfall loss and supplementary cost). Given these definitions, Keynes continues that there exists a stable relationship between the two, so any change in income usually corresponds to a change in net income based on this relationship. However, if net income increases and is not reflected in a change in income, this will affect the propensity to consume. This seems to make sense, if a normally reckless spender sees a decrease in his net income he may become more frugal. Practically, this is rarely seen as the obscene amount of debt in our society shows profligate people will spend money whether or not they possess the means to do so.
(III) Windfall changes in capital-values not allowed for in calculating net income - Keynes believes this factor to be much more important in modifying the propensity to consume than the previous one, because it is not related to income by some stable function. Keynes writes, "the consumption of the wealth-owning class may be extremely susceptible to unforeseen changes in the money-value of its wealth." Keynes is arguing that when the wealthy - he is not specific on what it means to be a part of the wealth-owning class - reap an unforeseen increase in money, they will strongly alter the propensity to consume in the short run. This also is susceptible to a practical criticism, as Eric has pointed out previously our Father would be highly unlikely to increase his spending if he won the lottery.
(IV) Changes in the rate of time-discounting, i.e. in the ratio of exchange between present goods and future goods - In fewer words, Keynes is discussing the effect of the interest rate on the propensity to consume. Keynes argues that in the short term any change in the interest rate will be highly unlikely to change the propensity to consume, but any long term change in the interest rate is capable of altering societal habits and ultimately affecting the propensity to consume. Since the interest rate affects investment decisions, it seems to follow that when people increase investment current consumption will fall. There will always be people who will consume almost all of their income no matter what the interest rate, and others who will favor saving and investment no matter how low the interest rate. Thus, individual have their own time preference which is reflected in the interest rate, but to say that this leads to a connection between the interest rate and society's propensity to consume - a term that has very little meaning - is a stretch.
(V) Changes in fiscal policy - This is a fairly simple point. When the government intervenes in the economy and people's lives through taxation, it is going to affect the amount of income individuals can devote to consumption. If a portion of your income is seized by the government every year, you are obviously not going to be able to buy an PS3 with that money. Keynes reveals his fondness for government intervention when he states, "If fiscal policy is used as a deliberate instrument for the more equal distribution of incomes, its effect in increasing the propensity to consume is, of course, all the greater." Just take money from the productive and give it to the poor to spend on consumer goods and the economy will grow forever.
(VI) Changes in expectations of the relation between the present and future level of income - Keynes, briefly states that although this factor may affect individual propensities to consume, it will most likely average out for the community as a whole.
After discussing these six objective factors, Keynes argues that the propensity to consume is a fairly stable function. Given that changes in the wage-unit are already imputed in the calculation of the propensity to consume, the factors exerting the most influence are windfall changes in capital values, long term and significant changes in the interest rate, and fiscal policy.
In the next section, Keynes looks past the factors which affect the propensity to consume in order to determine the shape and behavior of the function as a whole. His first conclusion is that as income increases, the gap between consumption and income widens. This is an observable fact, as a certain portion of one's income must be spent on the essentials, food, shelter, clothing, etc. If these comprise 95% of one's income their is little room for saving, especially if they buy the new big screen tv. Conversely, if these essentials comprise 10% of a man's income he will have room to consume luxuries as well as save a large portion of his income.
In the last section, Keynes steps away from the propensity to consume in order to look at investment because net income is equal to consumption plus net investment. Changes in investment patterns can cause a change in consumption, thus relating back to the propensity to consume in the end. Keynes goes into an empirical analysis of investment in the United States from 1925-1933 and Great Britain from 1928-1931. In the U.S. net capital formation falls from $23,021 to $1,237 in 1932. Until 1929, net capital investment remained at or above $23,000. According to Keynes, the problem is that "the deduction for entrepreneur's repairs, maintenance, depreciation and depletion remained at a high figure even at the bottom of the slump." This leads to a heavy drag on the propensity to consume even under conditions when the public is ready to consume a large portion of its income. Keynes is blatantly wrong in his analysis of the Great Depression, neglecting the fact that the majority of the capital invested during the 1920s was not real savings and thus created the bubble that led to the bust. I will refrain from a discussion of business cycle theory for the time being, but it is interesting to note Keynes' analysis of the time.
Keynes goes on to postulate that "financial prudence" - saving money for future use - lowers aggregate demand and harms employment. He continues with the claim that there must be "sufficient unemployment to keep us so poor that our consumption falls short of our income by no more than the equivalent of the physical provision for future consumption which it pays to produce today." I fail to see the logic in the popularity of an economist who believes the only way to avoid economic problems is to keep everyone poor. Keynes believes that if we get too rich, we will increase savings and investment until we have built all "the houses and roads and town halls and electric grids" that will ever be needed. What then are we to do? I think Keynes problem is that he does not begin his analysis from the point of view of the individual, as Mises demonstrated is essential to economic analysis. If we build all the roads, the consumers will demand better roads. Consumers will always look to better themselves, and entrepreneurs will always exist to satisfy those demands.
(I) A change in the wage-unit - Keynes argues that consumption is more a function of real income than of money-income, and because of this changes in the wage unit lead to changes in consumption. He continues that, "we have already allowed for changes in the wage-unit by defining the propensity to consume in terms of income measured in terms of wage-units." Thus, any effect a change in wages has on the propensity to consume has already been imputed in the definition.
(II) A change in the difference between income and net income - It is important to recall Keynes' distinction between income and net income for this section. If we look back to chapter VI, we see that Keynes defines income as the "excess of the value of his finished output sold during the period over his prime cost." Net income - according to Keynes - is the portion of income available for consumption, or income adjusted for the factors outlined in the discussion of chapter VI (i.e. windfall loss and supplementary cost). Given these definitions, Keynes continues that there exists a stable relationship between the two, so any change in income usually corresponds to a change in net income based on this relationship. However, if net income increases and is not reflected in a change in income, this will affect the propensity to consume. This seems to make sense, if a normally reckless spender sees a decrease in his net income he may become more frugal. Practically, this is rarely seen as the obscene amount of debt in our society shows profligate people will spend money whether or not they possess the means to do so.
(III) Windfall changes in capital-values not allowed for in calculating net income - Keynes believes this factor to be much more important in modifying the propensity to consume than the previous one, because it is not related to income by some stable function. Keynes writes, "the consumption of the wealth-owning class may be extremely susceptible to unforeseen changes in the money-value of its wealth." Keynes is arguing that when the wealthy - he is not specific on what it means to be a part of the wealth-owning class - reap an unforeseen increase in money, they will strongly alter the propensity to consume in the short run. This also is susceptible to a practical criticism, as Eric has pointed out previously our Father would be highly unlikely to increase his spending if he won the lottery.
(IV) Changes in the rate of time-discounting, i.e. in the ratio of exchange between present goods and future goods - In fewer words, Keynes is discussing the effect of the interest rate on the propensity to consume. Keynes argues that in the short term any change in the interest rate will be highly unlikely to change the propensity to consume, but any long term change in the interest rate is capable of altering societal habits and ultimately affecting the propensity to consume. Since the interest rate affects investment decisions, it seems to follow that when people increase investment current consumption will fall. There will always be people who will consume almost all of their income no matter what the interest rate, and others who will favor saving and investment no matter how low the interest rate. Thus, individual have their own time preference which is reflected in the interest rate, but to say that this leads to a connection between the interest rate and society's propensity to consume - a term that has very little meaning - is a stretch.
(V) Changes in fiscal policy - This is a fairly simple point. When the government intervenes in the economy and people's lives through taxation, it is going to affect the amount of income individuals can devote to consumption. If a portion of your income is seized by the government every year, you are obviously not going to be able to buy an PS3 with that money. Keynes reveals his fondness for government intervention when he states, "If fiscal policy is used as a deliberate instrument for the more equal distribution of incomes, its effect in increasing the propensity to consume is, of course, all the greater." Just take money from the productive and give it to the poor to spend on consumer goods and the economy will grow forever.
(VI) Changes in expectations of the relation between the present and future level of income - Keynes, briefly states that although this factor may affect individual propensities to consume, it will most likely average out for the community as a whole.
After discussing these six objective factors, Keynes argues that the propensity to consume is a fairly stable function. Given that changes in the wage-unit are already imputed in the calculation of the propensity to consume, the factors exerting the most influence are windfall changes in capital values, long term and significant changes in the interest rate, and fiscal policy.
In the next section, Keynes looks past the factors which affect the propensity to consume in order to determine the shape and behavior of the function as a whole. His first conclusion is that as income increases, the gap between consumption and income widens. This is an observable fact, as a certain portion of one's income must be spent on the essentials, food, shelter, clothing, etc. If these comprise 95% of one's income their is little room for saving, especially if they buy the new big screen tv. Conversely, if these essentials comprise 10% of a man's income he will have room to consume luxuries as well as save a large portion of his income.
In the last section, Keynes steps away from the propensity to consume in order to look at investment because net income is equal to consumption plus net investment. Changes in investment patterns can cause a change in consumption, thus relating back to the propensity to consume in the end. Keynes goes into an empirical analysis of investment in the United States from 1925-1933 and Great Britain from 1928-1931. In the U.S. net capital formation falls from $23,021 to $1,237 in 1932. Until 1929, net capital investment remained at or above $23,000. According to Keynes, the problem is that "the deduction for entrepreneur's repairs, maintenance, depreciation and depletion remained at a high figure even at the bottom of the slump." This leads to a heavy drag on the propensity to consume even under conditions when the public is ready to consume a large portion of its income. Keynes is blatantly wrong in his analysis of the Great Depression, neglecting the fact that the majority of the capital invested during the 1920s was not real savings and thus created the bubble that led to the bust. I will refrain from a discussion of business cycle theory for the time being, but it is interesting to note Keynes' analysis of the time.
Keynes goes on to postulate that "financial prudence" - saving money for future use - lowers aggregate demand and harms employment. He continues with the claim that there must be "sufficient unemployment to keep us so poor that our consumption falls short of our income by no more than the equivalent of the physical provision for future consumption which it pays to produce today." I fail to see the logic in the popularity of an economist who believes the only way to avoid economic problems is to keep everyone poor. Keynes believes that if we get too rich, we will increase savings and investment until we have built all "the houses and roads and town halls and electric grids" that will ever be needed. What then are we to do? I think Keynes problem is that he does not begin his analysis from the point of view of the individual, as Mises demonstrated is essential to economic analysis. If we build all the roads, the consumers will demand better roads. Consumers will always look to better themselves, and entrepreneurs will always exist to satisfy those demands.
Sunday, December 05, 2010
Try 'Em and Hang 'Em
This week's column was deemed too extreme for the paper. I understand that there are downsides to publishing radical commentary, and respect my editor's wishes. But since I've already written it, I'll post it here:
"It is terrible to contemplate how few politicians are hanged." - G.K. Chesterton
I run the risk of being thought sensational for starting a column with such an egregious quote. Good citizens are to know that the death of any public official, however mundane, is to be regarded as a tragedy. No matter the mistakes our leaders may have made—for it is to be understood that these morally superior beings could never commit crimes—we are to weep dutifully should they let slip this mortal coil. To argue for hanging outright is a far graver offense—probably treasonous.
The whole of the argument against punishing politicians depends on never applying the law to those who enforce it. Whether it's policemen who go free after shooting innocent people, or corrupt Congressmen who refuse to pay the taxes which fund their pet programs, authority is seldom held to the same standard imposed on the rest of us. This is very telling, for it demonstrates very clearly that, while the powers that be expect the peasantry to adhere to every jot and tittle of the law, they view themselves as above it.
If the object of the rulers was to instill virtue in the citizenry through the vehicle of law, it would be incumbent upon them to demonstrate respect by following the law themselves. Indeed, a case can be made that our leaders should be held to an even higher standard. For while the disinclination of the citizenry to follow a particular law can be altered through stricter penalties, once let the politicians ignore a law and it will become acceptable for it to be ignored in perpetuity.
In hanging politicians it can be difficult to know where to start. But then the reverse problem emerges: so many politicians are guilty of heinous crimes that we'll need more rope. Let us begin with the former Commander-in-Chief, that evil man, George W. Bush. It is to the eternal shame of the American people that we elected him, not once, but twice. In his recent book, which is selling like Mein Kampf, but which really ought to be compared to the non-existent memoirs of Commodus, he discusses his handling of the war in Iraq. This disastrous foreign policy misadventure has been written about incessantly over the last several years; there is no need to rehash the arguments against the war, or the paucity of the evidence which led us to undertake it.
But it is worth dwelling on the fact that no senior official has suffered appreciably for this nightmare foisted upon the American and Iraqi people. Oh, it's possible a few of them have consciences, and therefore lose sleep over the lives they've helped destroy; but no external punishment has been exacted, save to a few peons at Guantanamo. If starting a war under false pretenses isn't grounds for hanging, I'm not sure what is. Surely someone should be held responsible for the death and destruction. If a private citizen committed vigilante justice against a sex offender, he would still be tried, and it would require a sympathetic jury to acquit him for a righteous act. But start a war in which trillions of dollars are spent fruitlessly and thousands upon thousands die, and you get a nice little book tour.
Likewise with the current president. Republican rhetoric about Obama is so overwrought as to almost cause one to pity the man. The crucial thing to remember about Barry is that, like Bush, he's out of his depth. Bush was able to hide his shallowness through a team of Machiavellian advisors. Not so Barry, who is a clown surrounded by lesser clowns. Nowhere is this more evident than in the continuation of the wars in Afghanistan and Iraq. There is no rationale offered by the administration for the further shedding of blood. The wars continue because ending them might be politically disastrous; such is the banality of evil of which Hannah Arendt wrote. People die because hope-and-change lacks the courage to alter the State's policy of warfare. The failure to try Bush and his administration means that Obama will never be tried for his complicity in the crimes against the Afghani and Iraqi people.
Hanging a president would be an excellent precedent and a notable step towards the day when it becomes possible that an honorable man is elected to that position. But there are other criminals besides presidents. There is, for instance, Congress, who has been complicit in the Bush/Obama wars. There is also John Pistole, the head of the TSA, whose goons molest children to protect us from the terrorists. His TSA flunkies, who participate in this blatant violation of our rights as citizens, should be tried as well. Nuremberg made it clear that following orders is not an excuse for committing crime. Fondling children is criminal, and TSA agents should be punished accordingly.
No doubt my argument will be seen as a radical one. Yet it's worth pondering how radical it truly is. Why should it be seen as extreme that politicians are held responsible for their actions? Why is it that they are only to be punished by the ballot box—that is, with a nice book deal and a job as a lobbyist, in other words, never punished at all? Why do we tolerate behavior from state officials which would be deemed unconscionable if done by ordinary citizens?
These questions have powerful ramifications, because they illustrate how far a once free people has been willing to acquiesce in government misrule. It has become quite obvious that the politicians have no fear of ever being held accountable by the citizenry. Until they are made to realize that the law does in fact apply to them, they will act as if it does not. A trial would go along way toward reminding them of this fact. And a nice hanging would reinforce the lesson to the most obdurate of rulers.
"It is terrible to contemplate how few politicians are hanged." - G.K. Chesterton
I run the risk of being thought sensational for starting a column with such an egregious quote. Good citizens are to know that the death of any public official, however mundane, is to be regarded as a tragedy. No matter the mistakes our leaders may have made—for it is to be understood that these morally superior beings could never commit crimes—we are to weep dutifully should they let slip this mortal coil. To argue for hanging outright is a far graver offense—probably treasonous.
The whole of the argument against punishing politicians depends on never applying the law to those who enforce it. Whether it's policemen who go free after shooting innocent people, or corrupt Congressmen who refuse to pay the taxes which fund their pet programs, authority is seldom held to the same standard imposed on the rest of us. This is very telling, for it demonstrates very clearly that, while the powers that be expect the peasantry to adhere to every jot and tittle of the law, they view themselves as above it.
If the object of the rulers was to instill virtue in the citizenry through the vehicle of law, it would be incumbent upon them to demonstrate respect by following the law themselves. Indeed, a case can be made that our leaders should be held to an even higher standard. For while the disinclination of the citizenry to follow a particular law can be altered through stricter penalties, once let the politicians ignore a law and it will become acceptable for it to be ignored in perpetuity.
In hanging politicians it can be difficult to know where to start. But then the reverse problem emerges: so many politicians are guilty of heinous crimes that we'll need more rope. Let us begin with the former Commander-in-Chief, that evil man, George W. Bush. It is to the eternal shame of the American people that we elected him, not once, but twice. In his recent book, which is selling like Mein Kampf, but which really ought to be compared to the non-existent memoirs of Commodus, he discusses his handling of the war in Iraq. This disastrous foreign policy misadventure has been written about incessantly over the last several years; there is no need to rehash the arguments against the war, or the paucity of the evidence which led us to undertake it.
But it is worth dwelling on the fact that no senior official has suffered appreciably for this nightmare foisted upon the American and Iraqi people. Oh, it's possible a few of them have consciences, and therefore lose sleep over the lives they've helped destroy; but no external punishment has been exacted, save to a few peons at Guantanamo. If starting a war under false pretenses isn't grounds for hanging, I'm not sure what is. Surely someone should be held responsible for the death and destruction. If a private citizen committed vigilante justice against a sex offender, he would still be tried, and it would require a sympathetic jury to acquit him for a righteous act. But start a war in which trillions of dollars are spent fruitlessly and thousands upon thousands die, and you get a nice little book tour.
Likewise with the current president. Republican rhetoric about Obama is so overwrought as to almost cause one to pity the man. The crucial thing to remember about Barry is that, like Bush, he's out of his depth. Bush was able to hide his shallowness through a team of Machiavellian advisors. Not so Barry, who is a clown surrounded by lesser clowns. Nowhere is this more evident than in the continuation of the wars in Afghanistan and Iraq. There is no rationale offered by the administration for the further shedding of blood. The wars continue because ending them might be politically disastrous; such is the banality of evil of which Hannah Arendt wrote. People die because hope-and-change lacks the courage to alter the State's policy of warfare. The failure to try Bush and his administration means that Obama will never be tried for his complicity in the crimes against the Afghani and Iraqi people.
Hanging a president would be an excellent precedent and a notable step towards the day when it becomes possible that an honorable man is elected to that position. But there are other criminals besides presidents. There is, for instance, Congress, who has been complicit in the Bush/Obama wars. There is also John Pistole, the head of the TSA, whose goons molest children to protect us from the terrorists. His TSA flunkies, who participate in this blatant violation of our rights as citizens, should be tried as well. Nuremberg made it clear that following orders is not an excuse for committing crime. Fondling children is criminal, and TSA agents should be punished accordingly.
No doubt my argument will be seen as a radical one. Yet it's worth pondering how radical it truly is. Why should it be seen as extreme that politicians are held responsible for their actions? Why is it that they are only to be punished by the ballot box—that is, with a nice book deal and a job as a lobbyist, in other words, never punished at all? Why do we tolerate behavior from state officials which would be deemed unconscionable if done by ordinary citizens?
These questions have powerful ramifications, because they illustrate how far a once free people has been willing to acquiesce in government misrule. It has become quite obvious that the politicians have no fear of ever being held accountable by the citizenry. Until they are made to realize that the law does in fact apply to them, they will act as if it does not. A trial would go along way toward reminding them of this fact. And a nice hanging would reinforce the lesson to the most obdurate of rulers.
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