Yves here. Richard Murphy makes an extremely important point about how Keynes’ belief in the importance of well-functioning, cohesive societies and how sound economic policy could promote them. However, he skips over the fact that Keynes did not approve of much of Keynesian thinking, particularly the American Keynesianism developed and promoted by Paul Samuelson.
Samuelson had done his PhD thesis on neoclassical economics and admitted he had difficulty wrapping his mind around Keynes. An English economist, John Hicks, had developed a mathematical formalization that treated Keynesian theory simply as a special case of neoclassical economics, and that was embraced by Samuelson and his fellow travelers. Not only did Keynes repudiate Hicks, Hicks recanted his own work in his later life.
Admittedly, the most important difference between Keynes and these Keynesian knockoffs is their view of instability. Keynes viewed economies as inherently unstable; investors could freak out and withhold liquidity, which would dampen and even crash real economy activity. Economists like Samuelson who aspired to turn economics into a science recoiled at this view, since it meant they would not be able to model economic behavior in mathematical terms (for instance, recently retired professor Mark Thoma who taught macroeconomics said any macroeconomic modeler who was honest would have to admit their forecasts for more than six months out were unreliable).
So Samuelson and other mainstream economists embraced the assumption of ergodicity…that economies have a natural propensity to stability, and that stable state is one of full employment! For a longer-form discussion, see Chapter 2 of ECONNED or Paul Davidson’s The Keynes Solution.
Putting the “Keynesian” nitpicking aside, Murphy is correct to point out the need for governments to deliver what Lambert likes to stress as “material concrete benefits” for citizens. The Democratic party civil war between the progressive upstarts and the leadership is all about the growing and well-founded perception that government in the US is increasingly about promoting redistribution to and rent extraction by the rich at the expense of everyone else.
MMT proponents similarly make central the notion that government spending is constrained by real economy productive capacity. By implication, they would favor spending that increases capacity, such as infrastructure spending, more day care and after school programs to help working parents, and increased elder care.
By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK
The Guardian has an editorial this morning on Keynes and Keynesianism. In it they argue that:
In 1976 it was a British Labour prime minister, James Callaghan, who pronounced Keynesianism dead.
As they then note:
Monetarism, the economic theory that took over, has failed.
They then argue, reflecting a theme that I raised last week, that what we are seeing in response is that:
Many authoritarians are now using state power to lock in the dominance of the rich.
I think this indisputable.
I also think that the editorial missed a killer punch. That was, first of all, because they kept referring to Keynes, and not his motives, and yet it is his motives, and their contrast with those of monetarism that is critical. Keynes was motivated by social concern: monetarism was motivated by the desire for private profit. Keynes was about creating fairer societies, and monetarism was about creating inequality.
It is then appropriate to say, as the Guardian do, that:
Austerity meant the economy was starved of demand when inflation was low. The answer is for governments to spend.
But [the right are] not talking about the state intervening on the side of labour, redistributing wealth or socialising investment. Instead, the right now proposes a Keynesianism without Keynes.
This is correct, and yet it needs contextualisation. We have just seen an election where policies in the shadow of Keynes did not prevail. Whilst nationalisation, social housebuilding, the welfare state and much else that might be associated with Keynesian policy all poll well with focus groups they did not deliver election success for Labour.
Nor, come to that, did the Green New Deal in the way that Labour presented it. And that is because Keynes did not just want these things, as if they in themselves mattered. What he was particularly interested in, I suggest, was what they could deliver for people. In other words, what he wanted to address was not just an economic crisis, but the oppression of people’s hopes and aspirations and their replacement by fear. He knew he was fighting fascism, and he played a key role in achieving that goal.
This is the point that I think the Guardian misses. A new dose of Keynesianism is not enough. Nor, most especially, is a bout of non-Keynesian government spending. Keynesian spending is about transforming relationships in society. It is, then, about much more than the spend itself.
I believe that the Green New Deal, when properly done, is exactly that. It is aspirational. Instead of Labour being paranoid about the private sector gaining advantage from it, I would have every hope that a plethora of new businesses will be promoted by Green New Deal activity. Wouldn’t that make sense?
And I would hope too that the training programs, which have to be at the absolute core of everything that the Green New Deal does or no progress can be made, will provide skills for life, and not just for retrofitting insulation and triple glazed windows.
The spending that the government is now proposing is all about reinforcing Conservative control, and at its best that is about the maintenance of a power elite. The Green New Deal is all about the diversification of power to people and localities.
Both policies have at their core increased public spending. But one delivers that spending to maintain the status quo. The other spends to change that status quo for the benefit of all in society. Not all, then, is equal in what looks like Keynesian spending. In fact, the opposite is very much the case. And that has to be said, time and again.
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Yes, and weather is inherently unstable, is only predictable 3-6 days out as a dynamic system (and a steady state description would just be wrong), and further out people switch to descriptions of the chaotic attractors (“climate”).
And so? Does that mean that we retreat to BS “weather philosophy” or “political weather”?
No — it’s perfectly well mathematically modelable, as long as you a) don’t use 18th century steady state models for inherently non-steady state system — you have to have dynamic systems; b) mathematically well-define how long dynamic trajectories are stable, and their envelope of evolution; c) switch to the stochastic ensemble after that, using 20th century perturbation and chaos theory, for example.
The problem is plainly NOT that economics uses mathematical models — that’s a bit of nonsense.
The problem is that they apply 18th century steady state modeling and early 20th century game theory willy-nilly, without defining the limits of these models because doing the mathematics properly means recognizing the inherently limited predictive + control ability over these feedback loops. Only the wrong math gives the “right” answers.
Basically the same nonsense that killed Soviet economics — if the right math tells you you’re doing nonsense, choose the wrong math. (By the 50s, Soviet economists had already shown that their variety of central planning was inherently unstable — so the folks using the right math were driven off).
But waving your arms in despair and saying that there’s no good math throws you into the fallacy of the Austrians — that there’s no reasonable constraints and understanding, and it’s ultimately purely ideological (a buncha words with no science).
I think even for this, the (necessary) abstracting into assumptions is highly problematic, and (correspondingly), a lot has to do with the definition of the ‘it’ (‘economic behaviour); both are necessarily political I would argue. So there is no ‘right math’ in a objective sense.
Big mistake!
Whether or not the weather system is indeed mathematically modelable is a question. Whether the model is a “perfect” model is absolutely questionable! (Waddya mean “perfect”?)
The real problem is solving the model numerically. An unstable model cannot be solved exept for short time periods (Waddya mean “short?”) And anyway, we don’t have any way to accumulate all the necessary date, i.e., initial conditions, to numerically approximate a solution. In fact we never actually solve the equations, we only approximate a solution
This is a truly hard problem.
And this is a perfect analog to a the problem of building and solving a global economic model. Economics ain’t science.
“Whether or not the weather system is indeed mathematically modelable is a question.”
Weather is 100% physics. It contains nothing random. The difficulty with modelling it mathematically is purely its complexity and the subtleties of its feed-backs. As the historical data has been becoming more fine-grained and the computers doing the mathematical modelling have grown more powerful its predictive power has become more accurate at smaller and smaller scales. The only limiting factor for short term forecasting is the computing power available to be thrown at it. Longer term accurate forecasting, though, will always be hampered by the unpredictable, such as vulcanism.
Economics can never be mathematically moddled as it is riddled with the random – I had great sex last night so I’m feeling relaxed and in a good mood so what the hell, I’ll sell some shares and buy that new x (or treat the wife to it) – and the unpredictable, ie CoronaVirus.
One might argue that at the molecular level fluid dynamics (weather theory) is random. Einstein described Brownian motion as random. Assuming that the atmosphere is completely deterministic is necessary to apply certain conditions to make the mathematics easy (Navier-Stokes) but there is much that is truly random at the molecular and atomic (not sub atomic) level in our atmosphere.
I’ll add only one other item to Mr Brdford’s comment in the second paragraph and that is that all economic data contains unadmitted errors. The article is an easy and rewarding read.
Before the maths and physics can be applied one has to grapple with theory and what it quantifies. No good in applying the aforementioned to wonky prescriptive ideology or some romanticized notion of antiquity in order to burnish it, sell it, and then have politicians absolve their ability to react to anti social outcomes.
Then to top it all off have funding skew it, let alone instill path dependency – see Hicks or GDP.
Anywho …
Basically, the classical model is a model for a corn economy: households decide whether to consume the corn or to save it. If it is saved it can be supplied to investors who sow the grains, repaying to the households one period later the credit amount plus interest.
In the Keynesian model the ‘funds’ exchanged on the capital market are made up of money—‘funds’ are bank deposits. Funds are not created here by a renunciation of consumption but by the banks granting credit …
In the classical model, there is a strict crowding out of private investors on the capital market by government deficits. The all-purpose good, which functions equally as ‘funds’ and as investment good, can only be used once.
In the Keynesian model, on the other hand, ‘funds’ (money) and investment goods are independent of each other. Therefore there is no crowding out on the capital market, if deficits are financed by banks or the central bank. This is the fundamental insight of Modern Monetary Theory …
Young students need to wake up and realise they are being taught models whose laws of motion are as inconsistent with reality as Ptolemy’s world view. We need a ‘Fridays for Keynesianism’ movement. – Peter Bofinger
https://larspsyll.wordpress.com/2020/02/18/we-need-a-fridays-for-keynesianism-movement/
Digging a bit deeper and more to your comment …
https://inference-review.com/article/the-miracle-of-general-equilibrium
That does not even redress experiences like some I know of being threatened by orthodoxy … yes threatened on a personal level for begging the question.
Its just so Nicaeaian, where anything that does not conform to some simplistic notion that reinforces the political agenda is left on the editing room floor or worse labeled as heresy. Once that is done and dusted the orthodoxy – in a box – becomes empiric, where only A political is allowable – in lieu of political response – yet all unwashed are lead to believe [tm] their vote matters in a Market [tm] Democracy.
Lastly …
The Reformation in Economics is a book written by the Irish economist Philip Pilkington. It is a book that aims to deconstruct contemporary neoclassical economic theory in order to determine to what extent it is scientific and to what extent it is ideological.
The book is divided into three sections: Ideology and Methodology, Stripped-Down Macroeconomics and Approaching the Real World. The first section of the book engages in a deconstruction of economic theory that seeks to weed out the ideological elements of economic theory while introducing a coherent methodology that allows for the reconstruction that follows.
The second section lays out a theory of the macroeconomy that builds on the methodology described in the first section and tackles: money, prices, profits, income distribution, income determination, investment and finance. The final section sketches out how such a theory should be applied to real-world empirical data, with a particular emphasis on the fact that working economists are faced with fundamental uncertainty and so applying their theories is not as simple or straightforward as applying theories in the hard sciences, like physics.
In bold – Epistemology, Modelling and Bias
Pilkington argues that economists do not actually understand what they are doing when they build economic models. He argues that this is because economists have no coherent epistemology. In order to ground economics in a proper epistemology and render it useful and clear he draws on the work of the philosophers George Berkeley and Immanuel Kant. He argues that economics should move away from models altogether and toward a form of schematism as outlined in the philosophy of Kant. He also argues that since economists deal with abstractions they must be careful in order to ensure that their theories remain close to reality.
The book also argues that disciplines like economics can be subject to extreme biases that can have a highly negative impact on both theory and empirical studies. Pilkington writes that the reason for this is that economic studies cannot provide repeatable controlled experiments and so they can reach extremely biased results. In order to counter this he claims that economists should be aware of their biases and lays out a theory of bias in science to help elucidate this. – snip
So what are you applying maths and physics too again @pe?
With all due respect, this is ludicrous. You take a dismissive tone when you’ve put your foot in mouth and chewed.
It shows you have no idea of what risk and uncertainty mean, no real understanding of statistics, and no understanding of Keynes either.
I’m not even going to dignify this. Go do some homework. Google “Knightian uncertainty” for starters. Also bother doing basic reading on Mandelbrot and Lévy distributions. Mandelbrot, a vastly more accomplished mathematician than you will ever be, established that the alphas of the Lévy distributions of financial markets could not be calculated reliably but were certainly less than two, which is fatal to ANY modeling effort.
In the context of the UK there is a fair chance that what will be seen will be increased public spending on infrastructure projects in Tory marginal constituencies – pork barrel politics in other words – rather than any attempt to alleviate social problems more broadly. This is portrayed as moving to the centre but will it be? Time will tell.
Yes, I think we’ll certainly see a Keynesian approach (if you want to grace it with such a term) for infrastructure from Bojo – none of the people around him are macro austerians, they only believe in austerity for people not like them. He’s already proven to be an enthusiast for big glossy infrastructure schemes, especially the planning, where you get to have lovely models and flashy presentations – he is a little less enthusiastic about the reality of actually building things. PPP type schemes are ideal for funnelling vast amounts of public cash to the consultancy classes.
I’m not sure but weren’t schools of economics filled with professors that supported neoliberal economics? It resulted in neoliberalism being the dominate thinking.
Back when I did a mediocre economics undergraduate degree in the late 1980’s, my lecturers were often jokingly cynical about the general uselessness of the mathematical models they were teaching use. The highly respected macro Professor we had openly told us about the ‘crisis in macro’ – namely that the models were useless at predicting the future, which had us all wondering why on earth were were spending so much time studying them.
It was eyeopening to me over the years to see how these ‘useless’ models became fundamental to public policy, the underlying assumptions accepted unquestioningly by people who found them very useful indeed, but not in the manner intended. One lecturer in my course, who accurately predicting the Celtic Tiger crash, famously said that he knew the economy was doomed when he heard so many of his ex students on the radio, introduced as ‘Senior Bank Economists’, all assuring the public that a big crash couldn’t possibly happen. Significantly, he is an economic historian (a specialist in medieval Europe), not a theoretician.
Are you *sure* it was “not in the manner intended”? The ecological economist Herman Daly argues that economics is fundamentally an exercise in corruption: that post-Smith economists chose sides in the power struggle between resource-based landowners and trade-based merchants. They evidently chose the winning side, and may have contributed to the win, but we’re paying the price for that today.
Which is not to say the landowners were any nicer people or any more legitimate, but their loss is the reason economic models ignore resource constraints. Both Capitalist and Marxist models use only TWO “production factors,” labor and capital. There are three. Artificial capital and natural “capital” are not at all the same; landowners would know that, or go broke. As a lot of them did, of course.
Maybe the best place to start is to enforce antitrust laws. Follow that up with ending all regime change wars. Then the national energies can be put to more productive use, like building a more resilient real economy.
Those two statements seem totally reasonable and foundational beliefs of any American patriot. However, in the current political climate, these principles are viewed as totally unreasonable- by both political parties. The ruling factions of both parties embrace monopoly and desire war.
For an ordinary citizen, trying to feed their family and make ends meet, bringing about theses changes would mean changing the entire US political economy. In a word revolution- a true revolution. A revolution is required because the US economy has been fundamentally changed.
No monopolies, no wars of choice. The status quo elites view that stance as un-American.
This debate sounds like the anti-war isolationists leading up to the outbreak of WWII. The isolationists believed the country would be better served if it stayed out of foreign wars and focused on local problems. They lost that information and propaganda battle and the world went to war.
An argument can be made that WWII never really ended. The cold war that immediately followed the end of hostilities being a purposeful continuation of that hot war. It seems that every time peace breaks out, a war of choice must be found- at all costs. Hot wars fought by proxy armies, while the propaganda war rages non stop.
The US went into WWII in order to fight fascism, and ended up embracing fascism and hating communism- the idea of communism. So now authoritarian billionaires rule the US and are unfit to cope with any problem but protecting their billions and the nation seethes with fear and hate. This quality emanates from both parties.
Peace and strong economies embedded in local communities is the only way forward.
It is amusing to read all the “Keynes wanted this,” Keynes wanted that,” “Keynesian means this,” “Keynesian means that.” Not only do the writers generally not know what they are talking about, but more importantly, who cares?
Who cares what Keynes wanted and who cares what Keynesian means?
Rather than stressing about Keynes, stress about the economic realities. For example, I read that annual federal deficits were likely to exceed $1 Trillion dollars for the next decade. So, I predicted that if that proves true, we will not have a recession for the next decade.
That’s the important point, not whether Keynes would or would not approve.
Is there something wrong with the idea that government spending is constrained by real economy productive capacity? Is there something wrong with spending that increases capacity? I can’t figure out what is the purpose of that paragraph.
The implication is, I think, in contrast to prevailing neoliberal views that support the ability of the powerful to continue to exploit the less powerful, leading to e.g. social spending on privatization of public goods
Government spending usually increases production capacity. So if spending is constrained by capacity AND spending increases capacity, where does that leave us?
How does one determine whether capacity increases are sufficient to support the very thing that increases them?
I visualize an oil drilling machine that is fueled by oil. The more oil you pump into the machine, the more oil it pumps out of the ground.
Or consider the nuclear fusion problem. The purpose of a nuclear fusion reactor is to create more electricity than it consumes for operation. The machine is constrained by the amount of electricity it can consume, but it creates electricity. To date, none as passed the threshold of creating more than it uses.
So in an economy, does government spending create enough more capacity than it uses? Is the marginal return greater than zero?
I submit the question cannot be answered without answering myriad other questions, so to make the flat statement that spending is constrained by capacity adds nothing to zero knowledge.
Not that I’m against it, but “increased elder care” would not increase capacity. It employs a lot of people, but it’s consumption, not production – actually an example of th eproblems with GDP as a measurement.
Off the top, I liked that this fellow Murphy described himself as a political economist and a non-executive director. Those kinds of things get my attention.
What is missing from the critique is the dominance, at least in the US, of Military Keynesianism. The prime directive of Military Keynesianism is the production of non-consumables within the paradigm of maintaining aggregate demand without excessive inflation. That the suppression of labor was a handmaiden in this effort also goes unmentioned. Oh well, maybe he will write a column about this next week, but I don’t think that we will see it in The Guardian. In the meantime, read a bit of Seymour Melman.
I agree the GND is the best way to go. It seems like such a no-brainer that I worry there is some pitfall. Just thinking more about Picketty than Keynes here – it seems Keynes knew healthy societies were important for healthy economies, but what Picketty pointed out (with all the dreaded statistical analysis) is that unequal societies actually create bad economies and to rectify all of the inequality we need to regulate by taxing. Taxing the “rich”. It seems safe to say, imo, that grossly unequal societies not only create bad economies, they are self-defeating, they cannot succeed. Whether or not Picketty is promoting redistribution without good regulation is hard to say; and likewise Keynes seemed to assume that if societies were healthy everything would run like clockwork. So we can see that’s not really true and what we do need is environmental as well as social awareness. We need much better housekeeping. Regulation. That thing we all love to hate.
Regulation. That thing we all love to hate. StO
I drive a car. It has built in stability wrt the steering apart from driver input. That’s sane design. Likewise with airplanes except for some that are impossible for humans to fly without massive computer assistance.
The liabilities of depository institutions are supposed to serve the same purpose of providing built-in stability but the banks have long lobbied to render those liabilities a mere sham. The result is built-in instability.
So attempting to regulate an inherently unstable (not to mention unjust) system is an exercise in futility as centuries of experience with government privileged banks keep reminding us.
I think a much easier solution to the upward siphoning of wealth rather than its redistribution for infrastructure and social good would be to repeal Bill Clinton’s terrible tax code “exception.”
https://newrepublic.com/article/136516/bill-clinton-created-terrible-corporate-loophole-will-hillary-close-it
“Keynes viewed economies as inherently unstable; investors could freak out and withhold liquidity, which would dampen and even crash real economy activity.” IIRC, Keynes was a successful investor himself. What did he propose to do about this obvious flaw in fundamental design? It implies that boys gambling have a gun to everyone else’s head – as The Moustache (OK, Friedman) highlighted in Lexus and the Olive Tree, apparently without drawing the obvious lesson.
Some forms of instability, like epidemics, are unavoidable; but purely financial ones, like a handful of people “freaking out,” as they will do, are not. They’re design failures. Granted, the system was never really designed; it grew “like Topsy”, as my mother would say: piecemeal. But it has a design; there’ve been repeated efforts to improve it, but if the above is true, they’ve failed. I assume that reflects the distribution of power. The boys enjoy their power.
The positive effects of Keynesian spending on an economy depend on the existence of an economy to spend on that produces goods and services and puts people to work. Does the U.S. still have a ‘real’ economy to spend on? What do we produce in the U.S.? What kind of firms produce/provide goods to our economy? I agree with Norb [7:04 am] that “the best place to start is to enforce antitrust laws”. After that the U.S. must initiate policy to rebuild Industry — much of it from the ground up. This Industrial policy must include new Trade policy to dismantle ‘globalization’. Without rebuilding our economy Keynesian spending would fatten Corporate Cartels, employee Chinese, Indians, … and employee more truck drivers, perhaps a few more waiters and waitresses, and maybe some more baristas.
Existing antitrust laws have proven themselves ineffectual, and highly dependent on political decisions. They require bureaucrats with political bosses to make judgements about what is “too much” concentration.
To be effective, they can’t be dependent on essentially personal judgments. That would mean either flat limits on the size of businesses, or a steeply graduated tax rate based on size, objectively measured. Any exemptions should be legislated, and regulated like utilities. But financial businesses should NEVER be exempt. We need to “drown them in the bath.”
Not very principled since it boils down to “a few big thieves, bad; thousands of little thieves good” in the case of government-privileged depository institutions.
How about instead we eliminate ALL thievery by de-privileging ALL depository institutions?
How do you propose eliminating ALL depository institutions? I hope you might allow a few ‘all-right’ … ‘OK’ depository institutions … [?]. There are indeed little thieves to worry about. I am remiss in thinking other wise…. I like to think that little thieves are less rapacious … which is not necessarily the case — sorry
I am uncertain what you mean/intend by depository institutions in relation to government funding of a spending program. Please elaborate. I believe we may share concerns … but I am not sure what you refer to.
How do you propose eliminating ALL depository institutions?
Not eliminate, DE-PRIVILEGE.
Of course, one of their privileges is FREE* use of the Nation’s fiat and if charged enough for the use of fiat, banks, credit unions, etc. might find it unfeasible to keep deposits and thus eliminate themselves from that business and act as pure loan brokers instead.
*Worse than FREE, banks, credit unions, etc are PAID (Interest on Reserves) for their use of the Nation’s fiat – an outrage.
Will they be regulated?
Richard Murphy is absolutely right imo. Society rules. How can a government get the cooperation of its people if it constantly takes their money and abuses them. This fudge today of have two factions running parliament, each offering precisely the same policies is silly. The British people may believe they were right to throw away Corbyn but the time is not far off when they might regret their media-driven hysteria.
I know nothing of Corbyn. But is there no one of lesser stature who might represent whatever he represents? Is there no way and no one to re-assert his policies?
I sometimes get lost in the threads. My problem is linking indented “replies” to comments that textually precede them.
Regarding the “reply” above by Yves Smith with the time stamp “Feb 19 6:36 A.M.”, to which comment is it a reply?
Also, In the original submission, the following occurs Hicks recanted his own work in his later life.. Is there a source for this?
Thank you
Very first comment: @pe 4:16, looks like.