It is at this point that Keynes is ready to re-state his general theory, bringing together the many different topics he has touched on throughout the book.
Section I: Keynes describes the different variables that make up his economic model. Elements such as, "the existing skill and quantity of available labour, the existing quality and quantity of available equipment, the existing technique, the degree of competition, the tastes and habits of the consumer" are all taken as given and unchanging. The variables that are affected by these givens as well as other uncomputable factors are, "he propensity to consume, the schedule of the marginal efficiency of capital and the rate of interest" which Keynes dubs the independent variables. This leaves employment and national income as the dependent variables, or what he is trying to affect.
One might be led to ask why some factors are assumed as given while others are not, Keynes reasons:
The division of the determinants of the economic system into the two groups of given factors and independent variables is, of course, quite arbitrary from any absolute standpoint. The division must be made entirely on the basis of experience, so as to correspond on the one hand to the factors in which the changes seem to be so slow or so little relevant as to have only a small and comparatively negligible short-term influence on our quaesitum; and on the other hand to those factors in which the changes are found in practice to exercise a dominant influence on our quaesitum.
Thus, Keynes reveals his motive for establishing his general theory: determining the aspects of the economy which can be most easily manipulated by the government to increase employment and/or national income (GDP). As Keynes himself writes, "Our final task might be to select those variables which can be deliberately controlled or managed by central authority in the kind of system in which we actually live."
Section II: Here Keynes attempts to summarize the arguments made in the preceding chapters. Essentially he deduces from changes in one factor changes in subsequent factors until employment is affected. The numerous problems with some of his logic have already been noted, so I will move on.
Section III: Here Keynes notes that our economic system is relatively stable, rarely at full employment or high unemployment, but somewhere in the middle. From this observation, he describes his conditions of stability:
(i) When output increases because employment is increasing, the multiplier between them is slightly greater than one.
According to Keynes this is due to marginal propensity to consume, when employment expands consumption increases, but by less than the increase in income. This is not true when you introduce debt into the discussion, and the neglect of debt remains a large criticism of Keynes' theory.
(ii) "moderate changes in the prospective yield of capital or in the rate of interest will not be associated with very great changes in the rate of investment."
Keynes notes that this is not the case if their is a large surplus of capital-assets, but I think we can neglect this case as an outlier. Given that capital and the factors of production are scarce resources, small changes in the interest rate will result in small changes in investment. This is not a game changer, so we will continue on.
(iii) Changes in employment and money-wages tend to be in the same direction.
Keynes correctly notes that, "as employment increases, [the struggle for higher wages is] to be intensified in each individual case both because the bargaining position of the worker is improved and because the diminished marginal utility of his wage and his improved financial margin make him readier to run risks." Keynes continues that this leads to a stable price-level.
(iv) His last condition of stability is that when investment increases (or decreases) for a prolonged period of time, it has a tendency to reverse direction.
Keynes explains that if investment is declining for some period of time, it is likely that capital -assets will wear out over time. This will force an increase in investment. Furthermore, if investment rises too high, it will be forced in the opposite direction through a recession. This is only partially true; the recession only happens if the increased investment is not accompanied by increased savings. Conversely, but less likely, an economy can increase its time preference and decrease investment. The problem is not in whether or not investment is moving in one direction for an extended period of time, but when that change in investment is not accompanied by a change in savings.
Monday, May 02, 2011
Friday, April 29, 2011
Burke: "Reflections on the Revolution in France"
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
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
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.
Tuesday, March 08, 2011
NOR letter and reponse
For the last several years, I have read the New Oxford Review, a very good Catholic periodical. A book review therein was how I was made aware of Christopher Ferrara's book, The Church and the Libertarian, which I in turn reviewed.
Before I had read the book, I sent out a letter to the NOR, which they were kind enough to publish in the last issue. The author of the review responded to my letter. Both can be read here.
I have nothing to offer by way of response at this time. Although I am indebted to the Austrians and still consider myself a libertarian, I ought to put together a post clarifying my position regarding some shortcomings of the ideology. I hesitate to do so only because, while I can manage a critique, it will be much harder to sketch a suitable alternative.
Before I had read the book, I sent out a letter to the NOR, which they were kind enough to publish in the last issue. The author of the review responded to my letter. Both can be read here.
I have nothing to offer by way of response at this time. Although I am indebted to the Austrians and still consider myself a libertarian, I ought to put together a post clarifying my position regarding some shortcomings of the ideology. I hesitate to do so only because, while I can manage a critique, it will be much harder to sketch a suitable alternative.
Wednesday, March 02, 2011
Child-men and the Women Who Shun Them
Manning Up is the latest addition to the seemingly endless stream of books which examines the inadequacy of men. What sets it apart from the typical feminist screed is a tone that is neither triumphalist nor bitter. It's not at all surprising that Hymowitz is married and has children; even when criticizing man for his childish ways, she's cognizant of the precarious position in which he finds himself. That her book fails to convince is a point against it but it contains enough truth to be mined by the attentive reader. In a future effort, the author herself may buttress her inadequate solution by offering advice for women, who have created their own misfortune.
Hymowitz provides a good sketch of how we have arrived at the present predicament. In her writings on the successes of feminism, she deserves special credit for singling out the role played by "nineteenth- and twentieth-century market capitalism" in building "foundations of the New Girl Order." She notes that, increasingly, women are succeeding in the "knowledge economy", while men are falling behind—opting out as they either lack the skills or the ambition to compete. Such women are not inclined to notice—let alone date—those men who prefer bumming around in basements. These trends are disconcerting because of female preferences: women tend to date men of higher status. Success, then, seems to reduce the pool of available men. But—and this is important—this occurs only because women are reluctant to alter their preferences to date a less desirable man.
Although Hymowitz focuses on the alienation men have experienced, and rightly notes that the trend goes back more than a century, she doesn't seem to recognize its fundamental importance. If a boy is reasonably smart, he soon realizes that school is dull—college, too. His job may be no better, but at least it provides him with a paycheck. If he is married, he will work hard to provide for his wife and kids. Since he is not married, he takes to video games. The reason for his situation is important: the women his age are excitedly embarking on their own careers which provide "glamor, passion, and a life fully lived" and have no interest in settling down just yet.
Men have trouble relating to this passion for one's career. It's not that men cannot succeed; it's that he can see little reason to do so. The highly structured world women have created is, to put it mildly, frustrating for men. Contrary to Hymowitz's assertions, there is little room for genuine creativity, only the contrived and useless kind that allows one to decide which colors to use in a PowerPoint layout. If Hymowitz is disappointed that child-men are opting out, men are flabbergasted that anyone would consider something so transient as a "career" to be fulfilling. As Lester Freamon puts it, "The job will not save you."
In this vein, it remains unclear why the way of woman is superior to the way of men. Granted that drinking beer and reading Maxim is not the summum bonum, is it any worse than lighting scented candles and reading chick lit? It's one thing to set aside marriage prospects to work as a doctor in the third world, another entirely to work as a "diversity administrator" or a "compensation consultant" so that one can acquire another pair of shoes. That men do not need to work themselves ragged to achieve their goals might merely demonstrate resourcefulness and contentedness.
Hymowitz wants the child-men to man up so that women don't have to become spinsters or "choice mothers" at the expense of their careers. Might women alter their own behavior? "[T]he economic and cultural changes are too embedded, and, for women especially, too beneficial to reverse." So the answer is no. Although it is women who are becoming disenchanted with the way things are, and although it is women who have created this situation, it is men who ought to change.
And they are to change precisely when women are ready. Supposing men, many of whom are more or less invisible to women, set aside any resentment and dutifully marry the first woman who deigns to notice him in accordance with the ticking of her biological clock, would manning up thus set society to rights? Or would it merely reinforce the behavior of women? It's possible that the growing population of cat ladies will serve as a reminder to their younger sisters that beauty fades, and that it is often foolish to string along good men in the hopes of attaining a better one. Absent the spinsters, women will continue to behave irrationally, confident that men will save them from their duplicity. It's hard to fault the man who does not wish to play the fool.
Hymowitz provides a good sketch of how we have arrived at the present predicament. In her writings on the successes of feminism, she deserves special credit for singling out the role played by "nineteenth- and twentieth-century market capitalism" in building "foundations of the New Girl Order." She notes that, increasingly, women are succeeding in the "knowledge economy", while men are falling behind—opting out as they either lack the skills or the ambition to compete. Such women are not inclined to notice—let alone date—those men who prefer bumming around in basements. These trends are disconcerting because of female preferences: women tend to date men of higher status. Success, then, seems to reduce the pool of available men. But—and this is important—this occurs only because women are reluctant to alter their preferences to date a less desirable man.
Although Hymowitz focuses on the alienation men have experienced, and rightly notes that the trend goes back more than a century, she doesn't seem to recognize its fundamental importance. If a boy is reasonably smart, he soon realizes that school is dull—college, too. His job may be no better, but at least it provides him with a paycheck. If he is married, he will work hard to provide for his wife and kids. Since he is not married, he takes to video games. The reason for his situation is important: the women his age are excitedly embarking on their own careers which provide "glamor, passion, and a life fully lived" and have no interest in settling down just yet.
Men have trouble relating to this passion for one's career. It's not that men cannot succeed; it's that he can see little reason to do so. The highly structured world women have created is, to put it mildly, frustrating for men. Contrary to Hymowitz's assertions, there is little room for genuine creativity, only the contrived and useless kind that allows one to decide which colors to use in a PowerPoint layout. If Hymowitz is disappointed that child-men are opting out, men are flabbergasted that anyone would consider something so transient as a "career" to be fulfilling. As Lester Freamon puts it, "The job will not save you."
In this vein, it remains unclear why the way of woman is superior to the way of men. Granted that drinking beer and reading Maxim is not the summum bonum, is it any worse than lighting scented candles and reading chick lit? It's one thing to set aside marriage prospects to work as a doctor in the third world, another entirely to work as a "diversity administrator" or a "compensation consultant" so that one can acquire another pair of shoes. That men do not need to work themselves ragged to achieve their goals might merely demonstrate resourcefulness and contentedness.
Hymowitz wants the child-men to man up so that women don't have to become spinsters or "choice mothers" at the expense of their careers. Might women alter their own behavior? "[T]he economic and cultural changes are too embedded, and, for women especially, too beneficial to reverse." So the answer is no. Although it is women who are becoming disenchanted with the way things are, and although it is women who have created this situation, it is men who ought to change.
And they are to change precisely when women are ready. Supposing men, many of whom are more or less invisible to women, set aside any resentment and dutifully marry the first woman who deigns to notice him in accordance with the ticking of her biological clock, would manning up thus set society to rights? Or would it merely reinforce the behavior of women? It's possible that the growing population of cat ladies will serve as a reminder to their younger sisters that beauty fades, and that it is often foolish to string along good men in the hopes of attaining a better one. Absent the spinsters, women will continue to behave irrationally, confident that men will save them from their duplicity. It's hard to fault the man who does not wish to play the fool.
Saturday, February 19, 2011
Keynes - The General Theory - Chapter XIV
Section I: After expounding his own theory, in this next chapter, as well as in the Appendix that follows it, Keynes criticizes what he calls the classical theory of interest. This theory he has trouble stately precisely, for lack of "an explicit account of it in the leading treatises of the modern classical school." Not the adjective "modern": Keynes is referring mainly to Marshall and Pigou, whose works I have not read.
Still, Keynes manages a summary:
It is fairly clear, however, that this tradition has regarded the rate of interest as the factor which brings the demand for investment and the willingness to save into equilibrium with one another. Investment represents the demand for investable resources and saving represents the supply, whilst the rate of interest is the “price” of investable resources at which the two are equated. Just as the price of a commodity is necessarily fixed at that point where the demand for it is equal to the supply, so the rate of interest necessarily comes to rest under the play of market forces at the point where the amount of investment at that rate of interest is equal to the amount of saving at that rate.
He notes that "the ordinary man", who was "brought up on the traditional theory" believes: "that whenever an individual performs an act of saving he has done something which automatically brings down the rate of interest, that this automatically stimulates the output of capital." He also believes that this "takes place without the necessity for any special intervention or grandmotherly care on the part of the monetary authority." Yet: "the analysis of the previous chapters will have made it plain that this account of the matter must be erroneous."
Let's try to unpack this paragraph a bit. First, it's characteristic of Keynes to criticize a common sense approach to economics. Clearly common sense is not infallible, but it is curious how often Keynes's thought tends toward paradoxes. In this case, the man in the street is correct: an increase in savings will have the tendency to lower the rate of interest, thereby increasing investment, which assists in the output of capital. As savings increases, lenders have a larger pool from which to borrow; this competition among savers drives down the rate of interest. In addition, this competition occurs--or would occur--on the open market. The grandmotherly care of the central bank, on the other hand, distorts the rate of interest by increasing the money supply. This lowers the rate of interest, true, but it does so without demanding an increase in savings; hence it leads to malinvestment in certain sectors of the economy.
Returning to Keynes: "The independent variables of the classical theory of the rate of interest are the demand curve for capital and the influence of the rate of interest on the amount saved out of a given income; and when (e.g.) the demand curve for capital shifts, the new rate of interest, according to this theory, is given by the point of intersection between the new demand curve for capital and the curve relating the rate of interest to the amounts which will be saved out of the given income." We are told that this is nonsense. For a shift in either curve will necessarily cause income to change. He then walks us through an example to demonstrate that the classical theory must be corrected to account for changes in income. The chart he uses can be seen here.
The general idea is that the rate of interest is determined by the income: "The traditional analysis has been aware that saving depends on income but it has overlooked the fact that income depends on investment, in such fashion that, when investment changes, income must necessarily change in just that degree which is necessary to make the change in saving equal to the change in investment." Even having read this far along in his book, I confess confusion as to this aspect of his theory.
Granted that a change in income could alter the rate of savings, and therefore alter the interest rate, it does not follow that, if I increase my savings out of my unchanged stream of income, I will somehow see my salary reduce--or vice versa. If the investment proves propitious, and allows business to produce more goods at a lower cost, I can purchase these; this redounds to my benefit, but it has no effect on my income. And, in fact, the increased purchasing power is not a short-term benefit.
I have glanced over a matter of some importance. When faced with the notion that the money supply ought to remain constant, so that lending and borrowing can be properly coordinated by the market, Keynes notes: "The wild duck has dived down to the bottom — as deep as she can get — and bitten fast hold of the weed and tangle and all the rubbish that is down there, and it would need an extraordinarily clever dog to dive after and fish her up again.” Unfortunately, this is hardly an argument. It would have been more interesting for him to analyze what would happen if the money supply was kept constant.
The conclusion of this section--the only one in this chapter--is very important, so I will quote it at some length:
For the economic principle, on which the practical advice of economists has been almost invariably based, has assumed, in effect, that, cet. par., a decrease in spending will tend to lower the rate of interest and an increase in investment to raise it. But if what these two quantities determine is, not the rate of interest, but the aggregate volume of employment, then our outlook on the mechanism of the economic system will be profoundly changed. A decreased readiness to spend will be looked on in quite a different light if, instead of being regarded as a factor which will, cet. par., increase investment, it is seen as a factor which will, cet. par., diminish employment.
Here we have Keynesianism in a nutshell. Consumption is the engine which drives the economy. Reducing one's consumption leads to diminishing employment. As George W. Bush explained after 9/11, Americans ought to go to malls to spend money so as to stimulate the economy. Denigrated is the role played by the saver, who allocates funds for capital investment so as to extend the productive process, which provides the things we then consume.
Appendix: Since most of this section deals with extended quotations from Marshall, Pigou and Ricardo--as well as commentary from Keynes--I will refrain from commenting on this section. I did notice, however, that our author was familiar with the theory of interest of Ludwig von Mises as well as F. A. Hayek, who was a good friend of Keynes.
We've made far too many digressions into the realm of Austrian theory to pardon another one, but interested parties can discover the time-preference theory of interest in Mises's Theory of Money and Credit, which was restated in his magnum opus, Human Action, particularly in Chapter XIX.
Still, Keynes manages a summary:
It is fairly clear, however, that this tradition has regarded the rate of interest as the factor which brings the demand for investment and the willingness to save into equilibrium with one another. Investment represents the demand for investable resources and saving represents the supply, whilst the rate of interest is the “price” of investable resources at which the two are equated. Just as the price of a commodity is necessarily fixed at that point where the demand for it is equal to the supply, so the rate of interest necessarily comes to rest under the play of market forces at the point where the amount of investment at that rate of interest is equal to the amount of saving at that rate.
He notes that "the ordinary man", who was "brought up on the traditional theory" believes: "that whenever an individual performs an act of saving he has done something which automatically brings down the rate of interest, that this automatically stimulates the output of capital." He also believes that this "takes place without the necessity for any special intervention or grandmotherly care on the part of the monetary authority." Yet: "the analysis of the previous chapters will have made it plain that this account of the matter must be erroneous."
Let's try to unpack this paragraph a bit. First, it's characteristic of Keynes to criticize a common sense approach to economics. Clearly common sense is not infallible, but it is curious how often Keynes's thought tends toward paradoxes. In this case, the man in the street is correct: an increase in savings will have the tendency to lower the rate of interest, thereby increasing investment, which assists in the output of capital. As savings increases, lenders have a larger pool from which to borrow; this competition among savers drives down the rate of interest. In addition, this competition occurs--or would occur--on the open market. The grandmotherly care of the central bank, on the other hand, distorts the rate of interest by increasing the money supply. This lowers the rate of interest, true, but it does so without demanding an increase in savings; hence it leads to malinvestment in certain sectors of the economy.
Returning to Keynes: "The independent variables of the classical theory of the rate of interest are the demand curve for capital and the influence of the rate of interest on the amount saved out of a given income; and when (e.g.) the demand curve for capital shifts, the new rate of interest, according to this theory, is given by the point of intersection between the new demand curve for capital and the curve relating the rate of interest to the amounts which will be saved out of the given income." We are told that this is nonsense. For a shift in either curve will necessarily cause income to change. He then walks us through an example to demonstrate that the classical theory must be corrected to account for changes in income. The chart he uses can be seen here.
The general idea is that the rate of interest is determined by the income: "The traditional analysis has been aware that saving depends on income but it has overlooked the fact that income depends on investment, in such fashion that, when investment changes, income must necessarily change in just that degree which is necessary to make the change in saving equal to the change in investment." Even having read this far along in his book, I confess confusion as to this aspect of his theory.
Granted that a change in income could alter the rate of savings, and therefore alter the interest rate, it does not follow that, if I increase my savings out of my unchanged stream of income, I will somehow see my salary reduce--or vice versa. If the investment proves propitious, and allows business to produce more goods at a lower cost, I can purchase these; this redounds to my benefit, but it has no effect on my income. And, in fact, the increased purchasing power is not a short-term benefit.
I have glanced over a matter of some importance. When faced with the notion that the money supply ought to remain constant, so that lending and borrowing can be properly coordinated by the market, Keynes notes: "The wild duck has dived down to the bottom — as deep as she can get — and bitten fast hold of the weed and tangle and all the rubbish that is down there, and it would need an extraordinarily clever dog to dive after and fish her up again.” Unfortunately, this is hardly an argument. It would have been more interesting for him to analyze what would happen if the money supply was kept constant.
The conclusion of this section--the only one in this chapter--is very important, so I will quote it at some length:
For the economic principle, on which the practical advice of economists has been almost invariably based, has assumed, in effect, that, cet. par., a decrease in spending will tend to lower the rate of interest and an increase in investment to raise it. But if what these two quantities determine is, not the rate of interest, but the aggregate volume of employment, then our outlook on the mechanism of the economic system will be profoundly changed. A decreased readiness to spend will be looked on in quite a different light if, instead of being regarded as a factor which will, cet. par., increase investment, it is seen as a factor which will, cet. par., diminish employment.
Here we have Keynesianism in a nutshell. Consumption is the engine which drives the economy. Reducing one's consumption leads to diminishing employment. As George W. Bush explained after 9/11, Americans ought to go to malls to spend money so as to stimulate the economy. Denigrated is the role played by the saver, who allocates funds for capital investment so as to extend the productive process, which provides the things we then consume.
Appendix: Since most of this section deals with extended quotations from Marshall, Pigou and Ricardo--as well as commentary from Keynes--I will refrain from commenting on this section. I did notice, however, that our author was familiar with the theory of interest of Ludwig von Mises as well as F. A. Hayek, who was a good friend of Keynes.
We've made far too many digressions into the realm of Austrian theory to pardon another one, but interested parties can discover the time-preference theory of interest in Mises's Theory of Money and Credit, which was restated in his magnum opus, Human Action, particularly in Chapter XIX.
Tuesday, February 15, 2011
Timorous Tyrants
The Gitche Gummee Gamut is shutting down. I had sent in one additional column to my editor, so I'll post it here. It's unfortunate that the website didn't last very long. Selfishly, I appreciated the wider audience; and as an exceptionally lazy writer, a weekly deadline proved useful to my productivity.
But there's another reason the event is unfortunate. All politics is and ought to be local. We like to obsess over whichever bozo will take over the executive branch, but aside from ruining everything, a president is mostly useless. On the other hand the local school board can influence the education of the children who reside in the district--at least in theory. Anyone can write editorials about national politics--I know, because I do it. But to cover the minutiae requires diligence and a drive I can only vaguely fathom.
To a large extent, newspapers have abdicated their responsibility to the local communities; their inevitable destruction is well merited. Still, we'll miss something when the newspapers have gone away; it remains far from clear whether or not the Internet can and will fill this void--though my pessimistic prognostication is that it will fail to do so.
Anyway, here's a rosy column to warm your hearts:
"There are three basic ways to win obedience: by force, by buying consent with wealth, and by persuasion. Each of these three leads us to another level (military, economic, or intellectual) outside the political level." - Carroll Quigley, Tragedy and Hope
It should always be remembered, both by the rulers as well as the ruled, that all government depends on the consent of the governed. As our philosophers tell it, this does not require the threat of force, but in the real world, the implicit danger of violence is ever lurking, cajoling the citizenry into handing over consent. If this be doubted, try avoiding paying one's taxes. Unless one is politically well-connected, the government will force the taxpayer to consent to pay every last penny.
Good government tries to rule by persuasion. In the long-run, any other foundation is unstable. This is especially so when it comes to government by force. Maintaining a semblance of order requires drastic action without regard to ethical sensibilities. Thus Robespierre guillotined his fellow countrymen with impunity, and Stalin imprisoned millions of unfortunate "wreckers". Buying consent with wealth may seem a better option, but this too has its drawbacks. The main problem with this approach is that the government has no wealth of its own; anything it attains must be appropriated from the citizenry. Therefore, only a small portion thereof—what Angelo Codevilla dubbed the ruling class—can benefit from the pilfering. Consent bought can only come at the expense of content stolen from someone else. A witty saying of Frederic Bastiat's is relevant here: "The state is that great fiction by which everyone tries to live at the expense of everyone else."
For a good, which is to say, limited, government, persuasion is not terribly difficult. But if government intends to grow, it must depend on the people remaining ignorant of the harm being done to them. Thus trusting souls may have believed that the bailout of the bankers was for the good of the republic. But while the executives of Goldman-Sachs will no doubt consent to legislation from which they benefit so handsomely, it takes only a little bit of skepticism for the commoner to see that he is no better off than he was before--rather the opposite, probably. From the prospective of those in power, it would have made more sense to have paid off everyone's mortgage. It would also have been cheaper. But the complexities of our fraudulent banking system prevented those who wished to maintain the charade from taking this step. In return for the postponement of a greater recession, the elites gave up an opportunity to reinforce the always shaky consent of the governed.
While we should not discount the prospect of a demagogue rising to give hope to the masses—or, I should say, an effective one, since Obama lacks the gravitas to be a competent demagogue—I want to examine a less obvious route. So long as the people remain insensible to the harm caused to them by their own government, the elites may continue to rule, however tenuously. Hence the need for propaganda, to ensure that the truth must compete against the noble lies of the government. Previously in this space we've examined how the metrics used by the government to gauge the health of the economy have been willfully distorted over time to understate inflation and unemployment and to boost GDP. This is an excellent example of the sort of propaganda which benefits the government.
This approach works well, but for one thing. The Internet has leveled the playing field, reducing the influence of propaganda. These distortions of which I speak have been thoroughly documented on the web. Not for nothing, then, was there talk of an Internet kill switch, recently put into practice, with some success, by the Egyptian authorities during their recent revolution. Hence legislation is again being introduced into the U.S. Senate to inhibit the free exchange of ideas over the web. The supporters of the legislation will no doubt insist that they would only shut down the Internet for reasons of national security. At this point, terrorism is invoked to justify the fondling of children, the torturing of prisoners, the invasion of foreign countries, the indefinite detainment of suspects, as well as other violations of our Constitution, so I'd suggest taking the reasoning with a sizable grain of salt.
As Gary North has pointed out, shutting off the Internet will severely cripple economic productivity. This will cause even more unrest in the masses, so if the Internet is shut off, it will only happen temporarily. Moreover, once the Internet is restored, the threat, such that it is, will reemerge. From the perspective of the rulers, it would be more helpful if the government could simply whisk away a few of the leaders of any potential revolts—PATRIOT ACT them, so to speak, indefinitely. But, as we saw when the government went after Julian Assange of Wikileaks, even this does nothing to obstruct the dissemination of information; that of his organization become readily available on mirror sites all across the world.
I remain very much the pessimist about the future of our country. Conventional wisdom insists that, since the truth is more readily available on the Internet, it will help restore the lost liberty of the people. Yet there is no evidence that people care much for liberty—or truth. There is more than enough information available now to demonstrate the wretchedness of our government. Still, the people remain insensible.
However, in a sense, the revival of the legislation to shut down the Internet is a good sign for libertarians. This is true, not simply because, cut off from a steady supply of pornography and celebrity gossip, the rabble may become roused from its stupor. It is also because the leaders are revealing the extent of their fear of the people. While this may not restrain them from acting against us, it may cause them to overreach. The prospect of a third American revolution is not altogether dim.
But there's another reason the event is unfortunate. All politics is and ought to be local. We like to obsess over whichever bozo will take over the executive branch, but aside from ruining everything, a president is mostly useless. On the other hand the local school board can influence the education of the children who reside in the district--at least in theory. Anyone can write editorials about national politics--I know, because I do it. But to cover the minutiae requires diligence and a drive I can only vaguely fathom.
To a large extent, newspapers have abdicated their responsibility to the local communities; their inevitable destruction is well merited. Still, we'll miss something when the newspapers have gone away; it remains far from clear whether or not the Internet can and will fill this void--though my pessimistic prognostication is that it will fail to do so.
Anyway, here's a rosy column to warm your hearts:
"There are three basic ways to win obedience: by force, by buying consent with wealth, and by persuasion. Each of these three leads us to another level (military, economic, or intellectual) outside the political level." - Carroll Quigley, Tragedy and Hope
It should always be remembered, both by the rulers as well as the ruled, that all government depends on the consent of the governed. As our philosophers tell it, this does not require the threat of force, but in the real world, the implicit danger of violence is ever lurking, cajoling the citizenry into handing over consent. If this be doubted, try avoiding paying one's taxes. Unless one is politically well-connected, the government will force the taxpayer to consent to pay every last penny.
Good government tries to rule by persuasion. In the long-run, any other foundation is unstable. This is especially so when it comes to government by force. Maintaining a semblance of order requires drastic action without regard to ethical sensibilities. Thus Robespierre guillotined his fellow countrymen with impunity, and Stalin imprisoned millions of unfortunate "wreckers". Buying consent with wealth may seem a better option, but this too has its drawbacks. The main problem with this approach is that the government has no wealth of its own; anything it attains must be appropriated from the citizenry. Therefore, only a small portion thereof—what Angelo Codevilla dubbed the ruling class—can benefit from the pilfering. Consent bought can only come at the expense of content stolen from someone else. A witty saying of Frederic Bastiat's is relevant here: "The state is that great fiction by which everyone tries to live at the expense of everyone else."
For a good, which is to say, limited, government, persuasion is not terribly difficult. But if government intends to grow, it must depend on the people remaining ignorant of the harm being done to them. Thus trusting souls may have believed that the bailout of the bankers was for the good of the republic. But while the executives of Goldman-Sachs will no doubt consent to legislation from which they benefit so handsomely, it takes only a little bit of skepticism for the commoner to see that he is no better off than he was before--rather the opposite, probably. From the prospective of those in power, it would have made more sense to have paid off everyone's mortgage. It would also have been cheaper. But the complexities of our fraudulent banking system prevented those who wished to maintain the charade from taking this step. In return for the postponement of a greater recession, the elites gave up an opportunity to reinforce the always shaky consent of the governed.
While we should not discount the prospect of a demagogue rising to give hope to the masses—or, I should say, an effective one, since Obama lacks the gravitas to be a competent demagogue—I want to examine a less obvious route. So long as the people remain insensible to the harm caused to them by their own government, the elites may continue to rule, however tenuously. Hence the need for propaganda, to ensure that the truth must compete against the noble lies of the government. Previously in this space we've examined how the metrics used by the government to gauge the health of the economy have been willfully distorted over time to understate inflation and unemployment and to boost GDP. This is an excellent example of the sort of propaganda which benefits the government.
This approach works well, but for one thing. The Internet has leveled the playing field, reducing the influence of propaganda. These distortions of which I speak have been thoroughly documented on the web. Not for nothing, then, was there talk of an Internet kill switch, recently put into practice, with some success, by the Egyptian authorities during their recent revolution. Hence legislation is again being introduced into the U.S. Senate to inhibit the free exchange of ideas over the web. The supporters of the legislation will no doubt insist that they would only shut down the Internet for reasons of national security. At this point, terrorism is invoked to justify the fondling of children, the torturing of prisoners, the invasion of foreign countries, the indefinite detainment of suspects, as well as other violations of our Constitution, so I'd suggest taking the reasoning with a sizable grain of salt.
As Gary North has pointed out, shutting off the Internet will severely cripple economic productivity. This will cause even more unrest in the masses, so if the Internet is shut off, it will only happen temporarily. Moreover, once the Internet is restored, the threat, such that it is, will reemerge. From the perspective of the rulers, it would be more helpful if the government could simply whisk away a few of the leaders of any potential revolts—PATRIOT ACT them, so to speak, indefinitely. But, as we saw when the government went after Julian Assange of Wikileaks, even this does nothing to obstruct the dissemination of information; that of his organization become readily available on mirror sites all across the world.
I remain very much the pessimist about the future of our country. Conventional wisdom insists that, since the truth is more readily available on the Internet, it will help restore the lost liberty of the people. Yet there is no evidence that people care much for liberty—or truth. There is more than enough information available now to demonstrate the wretchedness of our government. Still, the people remain insensible.
However, in a sense, the revival of the legislation to shut down the Internet is a good sign for libertarians. This is true, not simply because, cut off from a steady supply of pornography and celebrity gossip, the rabble may become roused from its stupor. It is also because the leaders are revealing the extent of their fear of the people. While this may not restrain them from acting against us, it may cause them to overreach. The prospect of a third American revolution is not altogether dim.
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