Guest-blogger PJ here. Summer is approaching, and Eric has once again opened his blog for discussion of selected texts in the history of political thought. We begin with a short excerpt from Edmund Burke's _Reflections on the Revolution in France_. All quotations are from the Cohen and Fermon Princeton anthology.
Burke, writing about a year after the French revolutionaries stormed the Bastille, is sharply critical of the principles of their revolution. No small part of the posthumous reputation of his book lies in the extent to which his criticisms were apparently vindicated by the subsequent descent of the Revolution into the bloody Terror a mere three years later. Interestingly, however, Burke was not anti-revolutionary in principle: he championed the American cause after initial efforts to effect a compromise failed to yield the desired resolution. Indeed, he is at pains to remind his reader (in amusingly dated parlance) of his wholehearted devotion to political freedom: "I flatter myself that I love a manly, moral, regulated liberty as well as any gentleman" (349). What then are his objections to the republican ideals of the French? And why do they not apply to America?
The French Revolution was founded upon a declaration of the universal rights of man. The first article of the 1789 "Declaration of the Rights of Man and Citizen" states, "Men are born and remain free and equal in rights" (347). These rights are "liberty, property, security, and resistance to oppression" (ibid). The revolutionaries go on, in article 6, to ground their conception of right in Rousseau's doctrine of the general will, according to which sovereignty consists only in the "common interest" shared by all citizens, i.e., that which they cannot help but to will in abstraction from any particular interests they might have as particular individuals ("On the Social Contract" esp. p.284; cf. our discussion on this blog from last summer through the sidebar). This sovereignty, Rousseau insists, cannot be alienated: "the moment there is a master, there is no longer a sovereign" (283). Claims to authority have legitimacy if and only if they express the general will. The revolutionary implications of this radically democratic republicanism are obvious: I have the right to resist any political claim that I do not recognize as the rationally self-imposed product of my own will.
Burke's objection is to the artificial abstractness of this ideal. True liberty, he claims, cannot be severed from its social and political "circumstances," which "give in reality to every political principle its distinguishing color and discriminating effect" (349). These "circumstances" are primarily historical. Burke views society as an intergenerational contract, such as the ideals and principles binding for a people are those handed down to them by their fathers and which they too are so bound to pass along to their children (353). European civilization, as he sees it, is dependent upon two principles: the spirit of a gentleman and the spirit of religion (352). It is the institutions of chivalry and church that preserve, sustain, and disseminate the various mores constitutive of European civilization. They are all that stand between culture and barbarism, the only means we have of keeping ourselves morally decent, so to speak. Furthermore, they are not subject to abstract proof or deduction. Such principles prove themselves only through history, and it is a dangerous conceit to ask for anything more.
The mistake of the French revolutionaries, then, was their effort to abolish history, starting from scratch on the basis of a metaphysical principle. They went so far as to institute a new calendar at year zero! The problem is that pure reason is incapable of providing concrete direction to the will. Burke is quotable on this throughout. For instance: "The effect of liberty to individuals is, that they may do what they please: we ought to see what it will please them to do, before we risk congratulations, which may soon be turned into complaints" (350). The liberty of a gentleman or a Christian, by contrast, has a definite content in the sense that it offers a specific prescription as to the appropriate mode conduct for a given situation. It seems to me, in other words, that Burke is introducing a distinction between negative ("freedom from") and positive ("freedom to") liberty. All the French manage to assert is a negative liberty, the right to always say "no," a state of perpetual rebellion. It's a short path from here to Robispierre, for, as Burke puts it, "Kings will be tyrants from policy, when subjects are rebels from principle" (352).
The consistency of Burke's support for the American cause should then be clear. The American colonists could ground their declaration of independence and subsequent revolution upon historical achievement of the Glorious Revolution, laid down in the 1689 English Bill of Rights, which guarantees citizens parliamentary representation that the colonists were repeatedly denied.
That's all for now. Looking forward to your thoughts--
Cheers,
PJ
Friday, April 29, 2011
Tuesday, April 26, 2011
Keynes - The General Theory - Chapter XVII
In this chapter, Keynes examines some of "the essential properties of interest and money."
Section I: Continuing from the last chapter, Keynes postulates that: "the rate of interest on money plays a peculiar part in setting a limit to the level of employment." We must ascertain why this is the case.
In order to do so, in addition to the rate of interest for money, he introduces a rate of interest for every asset in the economy: "for every durable commodity we have a rate of interest in terms of itself, — a wheat-rate of interest, a copper-rate of interest, a house-rate of interest, even a steel-plant-rate of interest." He "proves" this by using an example; if the rate of interest is x and wheat pays x + a during the same time period, the wheat rate of interest is a.
It's puzzling as to why anyone could have maintained this theory. Part of the confusion, no doubt, stems from Keynes's failure to give the reason why the rate of interest exists. It emerges because of human time preference: we all prefer the same amount of a good sooner rather than later; in order to compel someone to give up usage of a good, he must be offered something in exchange. So if I want to borrow 100 dollars, I must promise to pay 105 dollars one year hence--if five dollars per year is the rate of interest. But the rate of interest, though paid in money, is not a characteristic of money; it is a direct result of time preference. Interest is commonly paid in money for the same reason wages are paid in money.
Now, in the futures market, like any other market, deals are made based on expected future prices. The so-called wheat rate of interest, then, is simply an anticipation of a rise or decline in wheat prices. It is not a rate of interest at all.
Section II: Building on this nonsense, Keynes seeks to use one rate of interest to calculate other rates of interest in the economy. This turns out to be easy: "To determine the relationships between the expected returns on different types of assets which are consistent with equilibrium, we must also know what the changes in relative values during the year are expected to be."
Did I say easy? I meant impossible, seeing that future prices cannot be calculated with any certainty. It is characteristic of Keynes that, instead of confronting the epistemological conundrum, he utilizes algebra to give mock precision to the unfathomable. This is either perniciousness or idiocy. I pass over regardless.
Section III: We have here some more fallacies about rates of interest. I'm afraid this chapter adds little to our understanding, not only of economics--for this is a reoccurring theme--but even with the Keynesian flavor. For instance, Keynes seems to think that the reason that the money rate of interest is significant--there is really only one rate of interest--is because money "cannot be readily produced." On the contrary, argues Ben Bernanke of the magical printing press.
Section IV: Keynes discusses the stickiness of wages in terms of money--as opposed to other commodities. This is a bit of a misnomer. Wages may be relatively sticky if the money supply remains constant, but a change in the supply of money will alter the stickiness of wages--barring legislation which enforces it. In short, the laws of supply and demand apply to all goods in the economy, money included. And, of course, there is nothing to prevent contracts from being drawn up for payment in any commodity--say, beer. People tend to use money because it is easier to exchange than beer. But we may yet see a return to exchanges in precious metals.
Section V: I find only one observation worthy of comment:
"That the world after several millennia of steady individual saving, is so poor as it is in accumulated capital-assets, is to be explained, in my opinion, neither by the improvident propensities of mankind, nor even by the destruction of war, but by the high liquidity-premiums formerly attaching to the ownership of land and now attaching to money."
That Keynes could really believe that the world had gotten poorer, and that this was somehow due to saving, testifies to the feebleness of his mind.
Section VI: He abandons his previous conception of a natural rate of interest, which, because it can comprise merely to the particular level of employment--in equilibrium, of course--offers us no edification. In its stead, he postulates a neutral or optimum rate of interest, which is that at which full employment is attained. Keynes does not tell us what the wage rates of the various employees will be, a telling omission, as we could surely create full employment quite easily if wages were allowed to fall far enough.
Section I: Continuing from the last chapter, Keynes postulates that: "the rate of interest on money plays a peculiar part in setting a limit to the level of employment." We must ascertain why this is the case.
In order to do so, in addition to the rate of interest for money, he introduces a rate of interest for every asset in the economy: "for every durable commodity we have a rate of interest in terms of itself, — a wheat-rate of interest, a copper-rate of interest, a house-rate of interest, even a steel-plant-rate of interest." He "proves" this by using an example; if the rate of interest is x and wheat pays x + a during the same time period, the wheat rate of interest is a.
It's puzzling as to why anyone could have maintained this theory. Part of the confusion, no doubt, stems from Keynes's failure to give the reason why the rate of interest exists. It emerges because of human time preference: we all prefer the same amount of a good sooner rather than later; in order to compel someone to give up usage of a good, he must be offered something in exchange. So if I want to borrow 100 dollars, I must promise to pay 105 dollars one year hence--if five dollars per year is the rate of interest. But the rate of interest, though paid in money, is not a characteristic of money; it is a direct result of time preference. Interest is commonly paid in money for the same reason wages are paid in money.
Now, in the futures market, like any other market, deals are made based on expected future prices. The so-called wheat rate of interest, then, is simply an anticipation of a rise or decline in wheat prices. It is not a rate of interest at all.
Section II: Building on this nonsense, Keynes seeks to use one rate of interest to calculate other rates of interest in the economy. This turns out to be easy: "To determine the relationships between the expected returns on different types of assets which are consistent with equilibrium, we must also know what the changes in relative values during the year are expected to be."
Did I say easy? I meant impossible, seeing that future prices cannot be calculated with any certainty. It is characteristic of Keynes that, instead of confronting the epistemological conundrum, he utilizes algebra to give mock precision to the unfathomable. This is either perniciousness or idiocy. I pass over regardless.
Section III: We have here some more fallacies about rates of interest. I'm afraid this chapter adds little to our understanding, not only of economics--for this is a reoccurring theme--but even with the Keynesian flavor. For instance, Keynes seems to think that the reason that the money rate of interest is significant--there is really only one rate of interest--is because money "cannot be readily produced." On the contrary, argues Ben Bernanke of the magical printing press.
Section IV: Keynes discusses the stickiness of wages in terms of money--as opposed to other commodities. This is a bit of a misnomer. Wages may be relatively sticky if the money supply remains constant, but a change in the supply of money will alter the stickiness of wages--barring legislation which enforces it. In short, the laws of supply and demand apply to all goods in the economy, money included. And, of course, there is nothing to prevent contracts from being drawn up for payment in any commodity--say, beer. People tend to use money because it is easier to exchange than beer. But we may yet see a return to exchanges in precious metals.
Section V: I find only one observation worthy of comment:
"That the world after several millennia of steady individual saving, is so poor as it is in accumulated capital-assets, is to be explained, in my opinion, neither by the improvident propensities of mankind, nor even by the destruction of war, but by the high liquidity-premiums formerly attaching to the ownership of land and now attaching to money."
That Keynes could really believe that the world had gotten poorer, and that this was somehow due to saving, testifies to the feebleness of his mind.
Section VI: He abandons his previous conception of a natural rate of interest, which, because it can comprise merely to the particular level of employment--in equilibrium, of course--offers us no edification. In its stead, he postulates a neutral or optimum rate of interest, which is that at which full employment is attained. Keynes does not tell us what the wage rates of the various employees will be, a telling omission, as we could surely create full employment quite easily if wages were allowed to fall far enough.
Saturday, April 23, 2011
The persistence of the "birthers"
A quick search through the archives ensures me that I've never written about the president's birth certificate. This is not to say that I haven't been following the story with a modicum of interest. The release of Jerome Corsi's new book, Where's the Birth Certificate, which, thanks to a link from Drudge, quickly jumped to number one on Amazon, seems as good a time as any to offer a few thoughts on the matter.
First, contrary to the protestations of the media--notice I do not say "mainstream" media: with the exception of WorldNetDaily, even the usual case of right-wingers has dismissed this issue--Obama has not released his birth certificate to the public. This is not unusual in and of itself--I can't think of a single public figure who has done so--but it does put the lie to those who, aside from a few key figures from the state of Hawaii, insist that they have seen the document. The debate really concerns those who trust the President and those who have vetted him, while the contrarians remain suspicious. It certainly wouldn't be the first the government has lied to its citizens; nor that an individual has trampled on the law in his pursuit of power.
I have no intention of reading Corsi's book, but I think it's instructive that such a book exists at all. There are evidently enough oddities and discrepancies surrounding the matter that one can write a good deal about it. The explanation that the tea-party is so incensed at Obama that they would cling zealously to an obvious myth doesn't really explain anything, since the myth, if it is one, is so profoundly easy to disprove. If one were seeking to discredit the president, it would be prudent to concoct a story which could not be decimated by the release of a single document. Obama's reluctance to release his birth certificate does not prove that he was born elsewhere; it does suggest that he is more concerned with maintaining secrecy even at the expense of further political controversy. This is especially bizarre since the release of the document would do grave damage to some of his political opponents.
It is probably asking too much of Americans to insist that partisanship be set aside to view the story dispassionately; I maintain that this is the weirdest political event of my short lifetime, and that, as such, it deserves some attention, and more than most Americans seem inclined to give it.
The story reveals something else: we still know very little about the man we elected president. I don't say this because I think Obama is a secret socialist or a closet Muslim, but because it is true, and therefore of interest. The historical blank slate that is Obama's past--with the exception, of course, of the narrative he constructed for himself in his two books--is his most distinguishable characteristic since it allowed his supporters to project upon him their hopes and dreams. For those of us who view American politics as akin to sport at this stage of our republic, Obama's failure to disclose certain information about his past is the most fascinating aspect of his presidency. I find it disappointing,though explicable for the usual reasons of dull partisanship, that so many seem genuinely uninterested in this angle,
I think it likely that the birth certificate issue will play a role in deciding the next presidential election; I can see no reason why this story will die down until the President's birth certificate is released. Eventually, the truth will be unveiled by future biographers. I don't think it's asking too much to insist that the people be given the information before it becomes a mere curiosity upon the conclusion of the Obama presidency.
First, contrary to the protestations of the media--notice I do not say "mainstream" media: with the exception of WorldNetDaily, even the usual case of right-wingers has dismissed this issue--Obama has not released his birth certificate to the public. This is not unusual in and of itself--I can't think of a single public figure who has done so--but it does put the lie to those who, aside from a few key figures from the state of Hawaii, insist that they have seen the document. The debate really concerns those who trust the President and those who have vetted him, while the contrarians remain suspicious. It certainly wouldn't be the first the government has lied to its citizens; nor that an individual has trampled on the law in his pursuit of power.
I have no intention of reading Corsi's book, but I think it's instructive that such a book exists at all. There are evidently enough oddities and discrepancies surrounding the matter that one can write a good deal about it. The explanation that the tea-party is so incensed at Obama that they would cling zealously to an obvious myth doesn't really explain anything, since the myth, if it is one, is so profoundly easy to disprove. If one were seeking to discredit the president, it would be prudent to concoct a story which could not be decimated by the release of a single document. Obama's reluctance to release his birth certificate does not prove that he was born elsewhere; it does suggest that he is more concerned with maintaining secrecy even at the expense of further political controversy. This is especially bizarre since the release of the document would do grave damage to some of his political opponents.
It is probably asking too much of Americans to insist that partisanship be set aside to view the story dispassionately; I maintain that this is the weirdest political event of my short lifetime, and that, as such, it deserves some attention, and more than most Americans seem inclined to give it.
The story reveals something else: we still know very little about the man we elected president. I don't say this because I think Obama is a secret socialist or a closet Muslim, but because it is true, and therefore of interest. The historical blank slate that is Obama's past--with the exception, of course, of the narrative he constructed for himself in his two books--is his most distinguishable characteristic since it allowed his supporters to project upon him their hopes and dreams. For those of us who view American politics as akin to sport at this stage of our republic, Obama's failure to disclose certain information about his past is the most fascinating aspect of his presidency. I find it disappointing,though explicable for the usual reasons of dull partisanship, that so many seem genuinely uninterested in this angle,
I think it likely that the birth certificate issue will play a role in deciding the next presidential election; I can see no reason why this story will die down until the President's birth certificate is released. Eventually, the truth will be unveiled by future biographers. I don't think it's asking too much to insist that the people be given the information before it becomes a mere curiosity upon the conclusion of the Obama presidency.
Sunday, April 10, 2011
Keynes - The General Theory - Chapter XVI
This chapter is chock-full of fallacies; I shall do my best to unpack them all.
Section I: Keynes levels another attack at his least favorite activity, saving:
An act of individual saving means — so to speak — a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day’s dinner without stimulating the business of making ready for some future act of consumption.
We've had cause to mention Keynes's refusal to use terms in a consistent manner. Earlier in his book, he insists that savings and investment must be equal; here he laments that savings may not be invested; instead, they may be hoarded indefinitely.
The fact of the matter is that people do not often choose to forgo dinner so as to hoard money. However, people will often refrain from ordering the most lavish dinner possible, saving some money for future dinners. And Scrooge McDuck aside, most people will leave money in the bank, where it is lent out--that is, invested. So we see that usually an act of saving leads to future consumption.
Keynes points out that: "the owner of wealth [does not desire] a capital-asset as such... what he really desires is its prospective yield." In other words, we do not value a house for its house-ness as such, but because it provides us with value, to wit, by giving us shelter. This is true enough, but hardly worth pointing out.
There is also a bit in this section about "forced savings", but I confess that this concept makes no sense to me, so I'll refrain from offering comment.
Section II: In place of fallacy, Keynes offers us platitudes:
For the only reason why an asset offers a prospect of yielding during its life services having an aggregate value greater than its initial supply price is because it is scarce; and it is kept scarce because of the competition of the rate of interest on money. If capital becomes less scarce, the excess yield will diminish, without its having become less productive — at least in the physical sense.
In short, things have value because they are scarce. Only Keynes could think that such a trite truism was somehow profound.
He goes on to discuss the "roundaboutness" of the productive process. If I pick an apple out of a tree, this is a short process. If I sharpen a stick so as to spear a fish, this is a slightly longer process, and requires the accumulation of capital--the stick. If I build a factory so as to produce automobiles, this is a longer process still, and requires a good deal of capital accumulation. Now, a process may be lengthy and still be inefficient; if I cannot produce a car for a price which the market will pay, my business will fail. Yet, in general, capital accumulation allows for the lengthening of the productive process, giving us higher order goods. Most of the amenities which we take for granted, require a good deal of investment in order to produce. This is plain.
Keynes will have none of this. His hatred of savings leads him to believe that he can shorten the productive process and still come out ahead.
In some phases of society it may be that we could get physically better dinners by dining later than we do; but it is equally conceivable in other phases that we could get better dinners by dining earlier.
This is tantamount to suggesting that if it takes three months to turn out a car, granting four months will do nothing to either improve the quality of the car or cheapen the cost of it. This conclusion is clearly illogical. The alternative, I suppose, is that in some circumstances producers should refrain from making cars, at least for a time. While true, this has little to do with the analysis of capital as such, the ostensible theme of this chapter.
Section III: He cavalierly supposes that laissez-faire leads to conditions "in which employment is low enough and the standard of life sufficiently miserable to bring savings to zero." It is true that these conditions do apply in primitive societies--though these also possess full employment, whatever good it may do them. But these conditions do not apply in capitalist societies; Keynes is simply making an emotional appeal, unchecked by reason or theory.
He then offers worse:
The only alternative position of equilibrium would be given by a situation in which a stock of capital sufficiently great to have a marginal efficiency of zero also represents an amount of wealth sufficiently great to satiate to the full the aggregate desire on the part of the public to make provision for the future, even with full employment, in circumstances where no bonus is obtainable in the form of interest.
Economics is concerned with scarcity. Keynes blithely assumes it away; capital is magically sufficient enough that it has no value, i.e. it is no longer scarce. We need not concern ourselves with such visions of utopia.
This section offers one last absurdity:
“To dig holes in the ground,” paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.
Since holes dug in the ground provide no value, workers must be paid by the only entity foolish enough to employ persons so pointlessly: the government. This payment will either be paid through taxes or inflation--borrowing being a temporary form of payment which must eventually be financed through taxes or inflation. To pursue the reductio ad absurdum, if the government paid everyone to dig holes, we would be the richest nation on the planet. And yet, despite the money we might have, there would be fewer goods produced, so that it would take a good deal of money to afford anything. Digging holes in the ground is as stupid as it sounds.
Section IV: Our economist laments that the rich collect money by charging rent on their property. But when scarcity fades, so too will those who live thus: "Though the rentier would disappear, there would still be room, nevertheless, for enterprise and skill in the estimation of prospective yields about which opinions could differ."
Yet this is true of all prospective yields. It was not long ago that many assured us that housing prices do not fall; but fall they did. Economic goods have subjective value, imputed by consumers. Therefore, there is room for considerable disagreement over any and all economic goods. Hence the entrepreneur will always provide a valuable service in a free economy.
Section I: Keynes levels another attack at his least favorite activity, saving:
An act of individual saving means — so to speak — a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day’s dinner without stimulating the business of making ready for some future act of consumption.
We've had cause to mention Keynes's refusal to use terms in a consistent manner. Earlier in his book, he insists that savings and investment must be equal; here he laments that savings may not be invested; instead, they may be hoarded indefinitely.
The fact of the matter is that people do not often choose to forgo dinner so as to hoard money. However, people will often refrain from ordering the most lavish dinner possible, saving some money for future dinners. And Scrooge McDuck aside, most people will leave money in the bank, where it is lent out--that is, invested. So we see that usually an act of saving leads to future consumption.
Keynes points out that: "the owner of wealth [does not desire] a capital-asset as such... what he really desires is its prospective yield." In other words, we do not value a house for its house-ness as such, but because it provides us with value, to wit, by giving us shelter. This is true enough, but hardly worth pointing out.
There is also a bit in this section about "forced savings", but I confess that this concept makes no sense to me, so I'll refrain from offering comment.
Section II: In place of fallacy, Keynes offers us platitudes:
For the only reason why an asset offers a prospect of yielding during its life services having an aggregate value greater than its initial supply price is because it is scarce; and it is kept scarce because of the competition of the rate of interest on money. If capital becomes less scarce, the excess yield will diminish, without its having become less productive — at least in the physical sense.
In short, things have value because they are scarce. Only Keynes could think that such a trite truism was somehow profound.
He goes on to discuss the "roundaboutness" of the productive process. If I pick an apple out of a tree, this is a short process. If I sharpen a stick so as to spear a fish, this is a slightly longer process, and requires the accumulation of capital--the stick. If I build a factory so as to produce automobiles, this is a longer process still, and requires a good deal of capital accumulation. Now, a process may be lengthy and still be inefficient; if I cannot produce a car for a price which the market will pay, my business will fail. Yet, in general, capital accumulation allows for the lengthening of the productive process, giving us higher order goods. Most of the amenities which we take for granted, require a good deal of investment in order to produce. This is plain.
Keynes will have none of this. His hatred of savings leads him to believe that he can shorten the productive process and still come out ahead.
In some phases of society it may be that we could get physically better dinners by dining later than we do; but it is equally conceivable in other phases that we could get better dinners by dining earlier.
This is tantamount to suggesting that if it takes three months to turn out a car, granting four months will do nothing to either improve the quality of the car or cheapen the cost of it. This conclusion is clearly illogical. The alternative, I suppose, is that in some circumstances producers should refrain from making cars, at least for a time. While true, this has little to do with the analysis of capital as such, the ostensible theme of this chapter.
Section III: He cavalierly supposes that laissez-faire leads to conditions "in which employment is low enough and the standard of life sufficiently miserable to bring savings to zero." It is true that these conditions do apply in primitive societies--though these also possess full employment, whatever good it may do them. But these conditions do not apply in capitalist societies; Keynes is simply making an emotional appeal, unchecked by reason or theory.
He then offers worse:
The only alternative position of equilibrium would be given by a situation in which a stock of capital sufficiently great to have a marginal efficiency of zero also represents an amount of wealth sufficiently great to satiate to the full the aggregate desire on the part of the public to make provision for the future, even with full employment, in circumstances where no bonus is obtainable in the form of interest.
Economics is concerned with scarcity. Keynes blithely assumes it away; capital is magically sufficient enough that it has no value, i.e. it is no longer scarce. We need not concern ourselves with such visions of utopia.
This section offers one last absurdity:
“To dig holes in the ground,” paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.
Since holes dug in the ground provide no value, workers must be paid by the only entity foolish enough to employ persons so pointlessly: the government. This payment will either be paid through taxes or inflation--borrowing being a temporary form of payment which must eventually be financed through taxes or inflation. To pursue the reductio ad absurdum, if the government paid everyone to dig holes, we would be the richest nation on the planet. And yet, despite the money we might have, there would be fewer goods produced, so that it would take a good deal of money to afford anything. Digging holes in the ground is as stupid as it sounds.
Section IV: Our economist laments that the rich collect money by charging rent on their property. But when scarcity fades, so too will those who live thus: "Though the rentier would disappear, there would still be room, nevertheless, for enterprise and skill in the estimation of prospective yields about which opinions could differ."
Yet this is true of all prospective yields. It was not long ago that many assured us that housing prices do not fall; but fall they did. Economic goods have subjective value, imputed by consumers. Therefore, there is room for considerable disagreement over any and all economic goods. Hence the entrepreneur will always provide a valuable service in a free economy.
Wednesday, April 06, 2011
Keynes - The General Theory - Chapter XV
My apologies for the lack of posting lately, school has been getting the better of me.
Keynes' focus in chapter XV deals with the incentives behind individuals choice for liquidity. The chapter is reminiscent of chapter's XIII and IX, which dealt with the factors which influence an individual's propensity to consume. As we will see, Keynes' logical flaws are the same here as they were on that topic. Keynes divides the incentives to liquidity into four categories:
(i) The income-motive: This motive is the need for cash to bridge the time between, "the receipt of income and its disbursement." This motive is dependent on the amount of income as well the "normal length of the interval" between receipt and disbursement. I'm not entirely sure how we can determine a normal length of time, but essentially this motive is the fact that when we receive cash in a transaction, we can't invest it in stock or deposit it in the bank immediately. This action takes time, and the amount of time is influenced by the amount of money trading hands.
(ii) The business-motive: This motive is the need for cash to bridge the time between, "incurring business costs and that of the receipt of the sale proceeds." The strength of this demand is dependent on the value of current output and the number of hands the product passes through. Keynes is not revealing anything new here, businesses need to acquire savings in order to pay for the factors of production needed to produce their good, which they will sell at a later date. This motive is a requirement 0f all businesses - without savings their can be no production - it is not necessarily a motive of liquidity.
(iii) The precautionary-motive: This motive is the need for money in your wallet, to serve the need for "sudden expenditures" or opportunities of "advantageous purchases." This makes sense, everyone needs to have money in order to pay for things like parking or a few beers at the bar. No one has all of their income tied up in savings or investments, their is a need for money to pay for short term demands.
(iv) The speculative-motive: Keynes devotes more time to this motive than the previous three because, "the demand for money to satisfy the former motives is generally irresponsive to any influence except the actual occurrence of a change in the general economic activity and the level of incomes." He continues explaining that the speculative-motive usually follows a continuous response to changes in the interest rate. If this were not true, open market operations would not be feasible, because, "in normal circumstances the banking system is in fact always able to purchase (or sell) bonds in exchange for cash by bidding the price of bonds up (or down) in the market by a modest amount; and the larger the quantity of cash which they seek to create (or cancel) by purchasing (or selling) bonds and debts, the greater must be the fall (or rise) in the rate of interest."
I have no quarrel with Keynes on this point being factually correct, but rather that it is economically irresponsible. We have seen the government's ability to change the interest rate through their open market operations (i.e. QE1 and QE2) but what has that done to help the economy recover? Keynes' inability to see that simply driving interest rates to 0% will not magically make people start investing. It was the manipulation of the interest rates of the fed which caused the malinvestment that led to the ongoing recession. Entrepreneurs are not going to start investing in capital because the fed floods the market with fresh $100, as the saying goes, "fool me once shame on you, fool me twice shame on you."
Keynes then begins to analyze liquidity preference mathematically. The expression he comes up is as follows: M = M1 + M2 = L1(Y) + L2(r), where M1 is the cash needed to satisfy motives i-iii, M2 is the cash needed to satisfy motive iv, Y is the level of income, r the interest rate, and L1 and L2 are the corrosponding liquidity functions for their respective cash levels (M1 and M2). Based on this equation, Keynes argues their are three factors which require his investigation, "(i) the relation of changes in M to Y and r, (ii) what determines the shape of L1, (iii) what determines the shape of L2." We will look at these matters individually as he does.
(i) Suppose the government decides to print money, increasing M. This would cause Y to increase and conversely increase M1. He then makes the claim that this increase in Y is not large enough for the increase in M to be adequately absorbed by the increase in M1. It follows that M2 must then increase as well. This comes about by a fall in r. Keynes does not explain why M2 must also increase, but there is a bigger concern here. Why must M = M1 + M2? Could the total money supply not equal 7 different subsets instead of 2? By viewing economics as a mathematical science rather than a praxeological one, Keynes is able to deduce any equation that serves his purpose.
(ii) Keynes claims the shape of L1 is determined by the income velocity of money. This is essentially the frequency at which money changes hands during a time period. If there is $1 million dollars in an economy, and $4 million worth of transactions take place in a year, then the income velocity of money is $4/yr. Neglecting the fact that I am highly skeptical this figure can be calculated with a great deal of accuracy, Keynes argues that this figure can be assumed as constant for the short run. This is Keynes' "proof" that both M1 and M2 must change with a change in M. His equation for L1, L1(Y) = Y/V = M1 means that no matter how much Y increases with an increase in M, M1 can only increase by a factor dependent on V (income velocity of money.
(iii) Keynes then stretches his reasoning far beyond what I would expect. He writes there is no quantifiable relationship between changes in M2 and r, but that in this case that doesn't matter. What matters is, "the degree of its divergence from what is considered a fairly safe level of r." If Keynes is going to argue his case for liquidity from a quantitative perspective, I would at least expect him to stick to it throughout the course of his argument. What is a safe interest rate, and who gets to decide it?
Lastly, Keynes points out a few limitations to a monetary authorities ability to establish the rate of interest. One particular limitation is worth a comment, "here is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest. But whilst this limiting case might become practically important in future, I know of no example of it hitherto."
This is one of the major problems with Keynes reasoning, simply because something has not happened to date does not mean it should be dismissed. The reckless policies of the Fed for nearly a century is leading up to a point when debt issued by the government will be seen as worthless. Even now, I would not buy a US Treasury security for the simple fact that I do not see the possibility of it being paid off. Once more and more people realize this, they will demand extremely high rates of return based on the risk of default. This will damage and possibly destroy the monetary authorities ability to manipulate the market at will.
Keynes' writings continue to get more and more confusing, both because he is a dismal writer and because his arguments contradict both what we are observing and what conventional wisdom leads one to believe.
Keynes' focus in chapter XV deals with the incentives behind individuals choice for liquidity. The chapter is reminiscent of chapter's XIII and IX, which dealt with the factors which influence an individual's propensity to consume. As we will see, Keynes' logical flaws are the same here as they were on that topic. Keynes divides the incentives to liquidity into four categories:
(i) The income-motive: This motive is the need for cash to bridge the time between, "the receipt of income and its disbursement." This motive is dependent on the amount of income as well the "normal length of the interval" between receipt and disbursement. I'm not entirely sure how we can determine a normal length of time, but essentially this motive is the fact that when we receive cash in a transaction, we can't invest it in stock or deposit it in the bank immediately. This action takes time, and the amount of time is influenced by the amount of money trading hands.
(ii) The business-motive: This motive is the need for cash to bridge the time between, "incurring business costs and that of the receipt of the sale proceeds." The strength of this demand is dependent on the value of current output and the number of hands the product passes through. Keynes is not revealing anything new here, businesses need to acquire savings in order to pay for the factors of production needed to produce their good, which they will sell at a later date. This motive is a requirement 0f all businesses - without savings their can be no production - it is not necessarily a motive of liquidity.
(iii) The precautionary-motive: This motive is the need for money in your wallet, to serve the need for "sudden expenditures" or opportunities of "advantageous purchases." This makes sense, everyone needs to have money in order to pay for things like parking or a few beers at the bar. No one has all of their income tied up in savings or investments, their is a need for money to pay for short term demands.
(iv) The speculative-motive: Keynes devotes more time to this motive than the previous three because, "the demand for money to satisfy the former motives is generally irresponsive to any influence except the actual occurrence of a change in the general economic activity and the level of incomes." He continues explaining that the speculative-motive usually follows a continuous response to changes in the interest rate. If this were not true, open market operations would not be feasible, because, "in normal circumstances the banking system is in fact always able to purchase (or sell) bonds in exchange for cash by bidding the price of bonds up (or down) in the market by a modest amount; and the larger the quantity of cash which they seek to create (or cancel) by purchasing (or selling) bonds and debts, the greater must be the fall (or rise) in the rate of interest."
I have no quarrel with Keynes on this point being factually correct, but rather that it is economically irresponsible. We have seen the government's ability to change the interest rate through their open market operations (i.e. QE1 and QE2) but what has that done to help the economy recover? Keynes' inability to see that simply driving interest rates to 0% will not magically make people start investing. It was the manipulation of the interest rates of the fed which caused the malinvestment that led to the ongoing recession. Entrepreneurs are not going to start investing in capital because the fed floods the market with fresh $100, as the saying goes, "fool me once shame on you, fool me twice shame on you."
Keynes then begins to analyze liquidity preference mathematically. The expression he comes up is as follows: M = M1 + M2 = L1(Y) + L2(r), where M1 is the cash needed to satisfy motives i-iii, M2 is the cash needed to satisfy motive iv, Y is the level of income, r the interest rate, and L1 and L2 are the corrosponding liquidity functions for their respective cash levels (M1 and M2). Based on this equation, Keynes argues their are three factors which require his investigation, "(i) the relation of changes in M to Y and r, (ii) what determines the shape of L1, (iii) what determines the shape of L2." We will look at these matters individually as he does.
(i) Suppose the government decides to print money, increasing M. This would cause Y to increase and conversely increase M1. He then makes the claim that this increase in Y is not large enough for the increase in M to be adequately absorbed by the increase in M1. It follows that M2 must then increase as well. This comes about by a fall in r. Keynes does not explain why M2 must also increase, but there is a bigger concern here. Why must M = M1 + M2? Could the total money supply not equal 7 different subsets instead of 2? By viewing economics as a mathematical science rather than a praxeological one, Keynes is able to deduce any equation that serves his purpose.
(ii) Keynes claims the shape of L1 is determined by the income velocity of money. This is essentially the frequency at which money changes hands during a time period. If there is $1 million dollars in an economy, and $4 million worth of transactions take place in a year, then the income velocity of money is $4/yr. Neglecting the fact that I am highly skeptical this figure can be calculated with a great deal of accuracy, Keynes argues that this figure can be assumed as constant for the short run. This is Keynes' "proof" that both M1 and M2 must change with a change in M. His equation for L1, L1(Y) = Y/V = M1 means that no matter how much Y increases with an increase in M, M1 can only increase by a factor dependent on V (income velocity of money.
(iii) Keynes then stretches his reasoning far beyond what I would expect. He writes there is no quantifiable relationship between changes in M2 and r, but that in this case that doesn't matter. What matters is, "the degree of its divergence from what is considered a fairly safe level of r." If Keynes is going to argue his case for liquidity from a quantitative perspective, I would at least expect him to stick to it throughout the course of his argument. What is a safe interest rate, and who gets to decide it?
Lastly, Keynes points out a few limitations to a monetary authorities ability to establish the rate of interest. One particular limitation is worth a comment, "here is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest. But whilst this limiting case might become practically important in future, I know of no example of it hitherto."
This is one of the major problems with Keynes reasoning, simply because something has not happened to date does not mean it should be dismissed. The reckless policies of the Fed for nearly a century is leading up to a point when debt issued by the government will be seen as worthless. Even now, I would not buy a US Treasury security for the simple fact that I do not see the possibility of it being paid off. Once more and more people realize this, they will demand extremely high rates of return based on the risk of default. This will damage and possibly destroy the monetary authorities ability to manipulate the market at will.
Keynes' writings continue to get more and more confusing, both because he is a dismal writer and because his arguments contradict both what we are observing and what conventional wisdom leads one to believe.
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