If you wish to be sceptical of this story (I’m fairly dubious about it myself), then fine, but Keynesians aren’t arguing what you think they’re arguing.
No, that’s precisely what I assumed they’re arguing, and I believe my points were completely responsive. I will address the position you describe in the context of the criticism in my rant.
The Keynesian theory of depressions and recessions is that excessive pessimism leads people to avoid investing or starting businesses, which lowers economic activity further, which promotes more pessimism, and so on.
The goal of stimulus is effectively to trick people into thinking the economy is better than it is, which then becomes a self-fulfilling prophesy;
Now, unpack the meaning of all of those terms, back to the fundamentals we really care about, and what is all that actually saying? Well, first of all, have you played rationalist taboo with this and tried to phrase everything without economics jargon, so as to fully break down exactly what all the above means at the layperson level? To me, economists seem to talk as if they have not done so.
I would like for you to tell me whether you have done so in the past, and write up the phrasing you get before reading further. You’ve already tabooed a lot, but I think you need to go further, and remove the terms: recession, depression, stimulus, excessive, pessimism, invest, and economic activity. (What’s left? Terms like prefer, satisfaction, wants, market exchange, resources, working, changing actions.)
Now, here’s what I get: (bracketed phrases indicate a substitution of standard economic jargon)
“People [believe that future market interactions with others will be less capable of satisfyng their wants], which leads them to [allocate resources so as to anticipate lower gains from such activity]. As people do this, the combined effect of their actions is to make this suspicion true, [increasing the relative benefit of non-market exchanges or unmeasured market exchanges].
“The government should therefore [purchase things on the market] in order to produce a [false signal of the relative merit of selling certain goods], and facilitate production of [goods people don’t want at current prices or that they previously couldn’t justify asking their government to provide]. This, then, becomes a self-fulfilling prophecy: once people [sell unwanted goods due to this government action], it actually becomes beneficial for others to sell goods people do want on the market, [preventing a different kind of adjustment to conditions from happening].”
Phrased in these terms, does it even make sense? Does it even claim to do something people might want?
People [believe that future market interactions with others will be less capable of satisfyng their wants]
That was a very useful exercise since it helped me identify the key point of disagreement between you an Keynesianism. If I’m right, you’re coming at this from a goods market perspective i.e. “I, a typical consumer am not interested in any of these goods at these prices, so I’m going to not buy so much”, whereas the Keynesians are blaming this kind of attitude: “I, a typical consumer am fearful of the future. While I want to buy stuff, I’d better start saving for the future instead in case I lose my job” and it’s the saving that triggers the recession (money flows out of the economy into savings, this fools people into thinking they are poorer and the death spiral begins).
A couple of other contextual points:
1) The monetary stimulus that Keynes recommended was based on governments running deficits, not necessarily spending more. Cutting taxes works just as well
2) Keynes was trying to reduce the magnitude of boom-bust swings, not increase trend economic growth rates. As such he prescribed the opposite behaviour in boom times, have government run surpluses to tamp down consumer exuberance. This is less widely known since politicians only ever talk about Keynes during recessions, when it gives them intellectual cover to spend lots of money.
3) The Keynesian consensus is not universal. Arnold Kling’s “recalculation” story is much closer to your picture, and you’ll notice he doesn’t advocate stimulus, but rather waiting to see how people adjust to the new economic circumstances.
4) GDP is the preoccupation of macroeconomists. Microeconomists (like me) care much more about allocative efficiency, which is to say to what extent are things in the hands of the people who value them most? So there’s a whole branch of the profession to which your initial GDP-centrism comment does not apply.
It’s points 3 and 4 in particular that lead me to object to your claim that economists are obsessed with GDP. To my way of thinking, it’s politicians that are obsessed with GDP because they believe their chances of re-election are tied to economic growth and unemployment figures. So they spend a lot of time asking economists how to increase GDP, and therefore economists more often than not to discuss GDP when they appear in public.
That was a very useful exercise since it helped me identify the key point of disagreement between you an Keynesianism. If I’m right, you’re coming at this from a goods market perspective i.e. “I, a typical consumer am not interested in any of these goods at these prices, so I’m going to not buy so much”, whereas the Keynesians are blaming this kind of attitude: “I, a typical consumer am fearful of the future. While I want to buy stuff, I’d better start saving for the future instead in case I lose my job” and it’s the saving that triggers the recession (money flows out of the economy into savings, this fools people into thinking they are poorer and the death spiral begins).
It’s still not clear to me that you’ve done what I asked (taboo your model’s predicates down to fundamentals laypeople care about), or that you have the understanding that would result from having done what I asked.
What’s the difference between the “goods market” perspective and the “blaming this kind of attitude”/Keynesian perspective? Why is one wrong or less helpful, and what problems would result from using it?
Why is it bad for people to believe they are poorer when they are in fact poorer?
Why is it bad for more money to go into savings? Why does “the economy” entirely hinge on money not doing this?
Until you can answer (or avoid assuming away) those problems, it’s not clear to me that your understanding is fully grounded in what we actually care about when we talk about a “good economy”, and so you’re making the same oversights I mentioned before.
you’re making the same oversights I mentioned before.
No, I’m not making those oversights because I am a) not a Keynesian and b) not a macroeconomist. My offering defences of this position should not be construed as fundamental agreement that position.
This is quickly turning into a debate about the merits of Keynesianism which is not a debate I am interested in because stabilisation policy is not my field and I don’t find it very interesting, I got enough of it at university. I’m going to touch on a few points here, but I’m not going to engage fully with your argument; you really need to talk to a Keynesian macroeconomist if you want to discuss most of this stuff. For one thing my ability to taboo certain words is affected by the fact I don’t have a very solid grip on the theory and I don’t spend much of my time thinking about high level aggregates like GDP.
Now here’s the best I can do on your bullet point questions, sorry if it doesn’t help much, but it’s all I’ve got:
1) The difference is that Keynesians believe savings reduce the money supply by taking money out of circulation, this makes them think they are poorer, which makes them act like they’re poorer, which makes other people poorer.
2) Because it starts with an illusion of poverty. The first cause of recessions in a Keynesian model is “animal spirits”, or in layman’s terms, irrational fear of financial collapse. Viewed from this perspective, stimulus is a hack that undoes the irrationality that caused the problem in the first place (and because it’s caused by irrationality they can feel confident it is a problem).
3) This is actually one of my biggest problems with Keynesian theory. If it strikes you as counter-intuitive or silly, I’m not going to dissuade you.
One final point:
The reason I replied to your initial comment in the first place, was your suggestion that all economists are obsessed with maximising measured GDP over everything else.
But many economists don’t deal with GDP at all. When I was learning labour market theory we were taught that once people’s wage rate gets high enough, one could expect them to work fewer hours since the demand for leisure time increases with income. There was never a suggestion that this was anything to be concerned about, the goal is utility, not income.
In environmental economics I recall reading a paper by Robert Solow (the seminal figure in the theory of economic growth) arguing that it was important to consider changes in environmental quality along with GDP, to get a better picture of how well off people really are.
I look at what I have been taught in economics, and I simply can’t square it with your view of the profession. Some kinds of economists tend to be obsessed with growth, but they tend to be economists who specialise in economic growth. The rest of us have other pursuits, and other obsessions.
Alright, I’ll let anyone judge for themselves if the canonical Keynesian replies reveal a truly grounded understanding of what counts as “helping the economy”.
you really need to talk to a Keynesian macroeconomist if you want to discuss most of this stuff. For one thing my ability to taboo certain words is affected by the fact I don’t have a very solid grip on the theory …
Forget Keynesian theory for a minute: I want to know if you have the understanding I expect of whatever theory it is you do endorse. Can you taboo that theory’s terminology and ground it layperson level fundamentals? Can you force me to care about whatever jargon you do in fact use?
Because, at risk of sounding rude, I don’t think you’ve acquired this “Level 2” understanding, and I don’t think you’re atypical among economists in lacking it—from what I’ve read of Mankiw, Sumner, and Krugman, they don’t have it either.
(btw, you call yourself an economist but don’t have a grip on Keynesian theory? Isn’t that pretty much required these days?)
One final point: The reason I replied to your initial comment in the first place, was your suggestion that all economists are obsessed with maximising measured GDP over everything else.
But many economists don’t deal with GDP at all. …I look at what I have been taught in economics, and I simply can’t square it with your view of the profession. Some kinds of economists tend to be obsessed with growth, but they tend to be economists who specialise in economic growth.
Sure—I only meant that economic policy advocates who are concerned about aggregate economic variables are obsessed with GDP as one of those variables, but that should be assumed from context. Obviously, you’re not going to care about GDP in your capacity as a microeconomist of company behavior.
Because, at risk of sounding rude, I don’t think you’ve acquired this “Level 2” understanding … (btw, you call yourself an economist but don’t have a grip on Keynesian theory? Isn’t that pretty much required these days?)
On macro policy I doubt I have level 2 understanding. I had to take papers in macro at university, and I was able to get reasonable grades on them, but level 0 or 1 understanding is sufficient to do that.
My guess is that if you asked a Keynesian why they care, they would say that boom-bust cycles create uncertainty and fear in people because they don’t know if they’re going to lose their job (and they want their job, or they’d have already quit) and by taming the boom-bust cycle people will have a more certain and therefore more pleasant life).
Equally if you asked a development economist, they would point to the misery in third world countries and for wealthy countries point out that productivity growth means being able to do more with less, and whether you want to have more, or want to do less, that’s a win. Unemployed people are by definition people who want a job but don’t have one, so concern about unemployment is easy to work out.
And as for me, well the reason I care about allocative efficiency is that allocative efficiency is the attempt to match reality to people’s preferences as well as is possible under current constraints. How do we use our resources and knowledge to create the things people want and how do we get them to the people who want them the most?
The market does a pretty good job of this most of the time, but it does fail sometimes. And when it fails there are things government can do to improve matters, but the government can fail too, so you have to balance out the imperfections of the market and the imperfections of government and try to work out which set of imperfections is more problematic. If I succeed, or if people like me succeed then people will have more of what they want, be that flat screen TVs, or cars or clean air or time with their families. Not everything falls within economics’ purview of course, love and truth and beauty are things I can’t help with. But for everything else, my goal is to help the market to match infinite wants with finite resources, and imperfect information.
Sure—I only meant that economic policy advocates who are concerned about aggregate economic variables are obsessed with GDP as one of those variables, but that should be assumed from context.
Perhaps it should have been, but I failed to assume this. And microeconomics is a lot wider than company behaviour, it covers pretty much everything but GDP and unemployment.
And as for me, well the reason I care about allocative efficiency is that allocative efficiency is the attempt to match reality to people’s preferences as well as is possible under current constraints. How do we use our resources and knowledge to create the things people want and how do we get them to the people who want them the most?
That wasn’t the question or contributory thereto, though it shows you can ground one concept.
The question is, whatever model/theory you have of the economy, are its predicates fully grounded in what laypersons care about? You mentioned things people care about, but not how they fit into the model that you advocate.
Allocative efficiency is what I work with. If you asked me why I care about GDP, my response would be, “I don’t, particularly”.
As for my economic model, I can’t give you a full rundown in a comment, but here’s the short version:
1) Level 1 is the fully ideal version, unrealistic, but useful for grounding the whole thing in people’s preferences. It basically rests on the notion that if you make a battery of assumptions voluntary exchange will result in allocative efficiency, if person A values something more than person B then they will trade, either directly or through side trades until person A has it. Yes there are a lot of reasons this doesn’t work in practice, but that’s level 2.
2) Level 2 picks at all those assumptions in level 1. Things like externalities (like pollution) imperfect information, irrational behaviour, imperfect competition, transaction costs and other git in the gears. These things cause violations of the assumptions in 1, and therefore prevent potentially efficiency-enhancing trades from occurring. The academic work at level 2 is focused around identifying these problems and considering possible solutions a government could introduce to correct for them.
3) Level 3 looks at the ability of government to effectively implement the policies identified at level 2. Theories like social choice theory (the ability of voting systems to effectively aggregate votes into social preferences) and public choice theory (how well do governments act as agents of the voting public). The academic work at level 3 is focused around identifying the limitations of real world governments, and identifying the side-effects of badly implemented policies.
Level 1 is all about individual preferences, not attempting to measure them directly because you can’t, but rather in setting up a system so people can sort it out themselves.
As for how GDP factors in, well they it doesn’t directly. Macro and micro aren’t integrated, they haven’t been since Keynes. You learn about them indifferent courses, people tend not to specialise in both, so there’s a gap there. Hence the reason I don’t care about GDP per se.
Now productivity I care about, because higher productivity means more resources for people to trade with and more preferences can be satisfied. I care about unemployment because it implies people are willing to make a trade, but unable to do so due to some bug in the system, either a level 2 problem (market failure), or a level 3 problem (government failure).
No, that’s precisely what I assumed they’re arguing, and I believe my points were completely responsive. I will address the position you describe in the context of the criticism in my rant.
Now, unpack the meaning of all of those terms, back to the fundamentals we really care about, and what is all that actually saying? Well, first of all, have you played rationalist taboo with this and tried to phrase everything without economics jargon, so as to fully break down exactly what all the above means at the layperson level? To me, economists seem to talk as if they have not done so.
I would like for you to tell me whether you have done so in the past, and write up the phrasing you get before reading further. You’ve already tabooed a lot, but I think you need to go further, and remove the terms: recession, depression, stimulus, excessive, pessimism, invest, and economic activity. (What’s left? Terms like prefer, satisfaction, wants, market exchange, resources, working, changing actions.)
Now, here’s what I get: (bracketed phrases indicate a substitution of standard economic jargon)
“People [believe that future market interactions with others will be less capable of satisfyng their wants], which leads them to [allocate resources so as to anticipate lower gains from such activity]. As people do this, the combined effect of their actions is to make this suspicion true, [increasing the relative benefit of non-market exchanges or unmeasured market exchanges].
“The government should therefore [purchase things on the market] in order to produce a [false signal of the relative merit of selling certain goods], and facilitate production of [goods people don’t want at current prices or that they previously couldn’t justify asking their government to provide]. This, then, becomes a self-fulfilling prophecy: once people [sell unwanted goods due to this government action], it actually becomes beneficial for others to sell goods people do want on the market, [preventing a different kind of adjustment to conditions from happening].”
Phrased in these terms, does it even make sense? Does it even claim to do something people might want?
That was a very useful exercise since it helped me identify the key point of disagreement between you an Keynesianism. If I’m right, you’re coming at this from a goods market perspective i.e. “I, a typical consumer am not interested in any of these goods at these prices, so I’m going to not buy so much”, whereas the Keynesians are blaming this kind of attitude: “I, a typical consumer am fearful of the future. While I want to buy stuff, I’d better start saving for the future instead in case I lose my job” and it’s the saving that triggers the recession (money flows out of the economy into savings, this fools people into thinking they are poorer and the death spiral begins).
A couple of other contextual points: 1) The monetary stimulus that Keynes recommended was based on governments running deficits, not necessarily spending more. Cutting taxes works just as well
2) Keynes was trying to reduce the magnitude of boom-bust swings, not increase trend economic growth rates. As such he prescribed the opposite behaviour in boom times, have government run surpluses to tamp down consumer exuberance. This is less widely known since politicians only ever talk about Keynes during recessions, when it gives them intellectual cover to spend lots of money.
3) The Keynesian consensus is not universal. Arnold Kling’s “recalculation” story is much closer to your picture, and you’ll notice he doesn’t advocate stimulus, but rather waiting to see how people adjust to the new economic circumstances.
4) GDP is the preoccupation of macroeconomists. Microeconomists (like me) care much more about allocative efficiency, which is to say to what extent are things in the hands of the people who value them most? So there’s a whole branch of the profession to which your initial GDP-centrism comment does not apply.
It’s points 3 and 4 in particular that lead me to object to your claim that economists are obsessed with GDP. To my way of thinking, it’s politicians that are obsessed with GDP because they believe their chances of re-election are tied to economic growth and unemployment figures. So they spend a lot of time asking economists how to increase GDP, and therefore economists more often than not to discuss GDP when they appear in public.
It’s still not clear to me that you’ve done what I asked (taboo your model’s predicates down to fundamentals laypeople care about), or that you have the understanding that would result from having done what I asked.
What’s the difference between the “goods market” perspective and the “blaming this kind of attitude”/Keynesian perspective? Why is one wrong or less helpful, and what problems would result from using it?
Why is it bad for people to believe they are poorer when they are in fact poorer?
Why is it bad for more money to go into savings? Why does “the economy” entirely hinge on money not doing this?
Until you can answer (or avoid assuming away) those problems, it’s not clear to me that your understanding is fully grounded in what we actually care about when we talk about a “good economy”, and so you’re making the same oversights I mentioned before.
No, I’m not making those oversights because I am a) not a Keynesian and b) not a macroeconomist. My offering defences of this position should not be construed as fundamental agreement that position.
This is quickly turning into a debate about the merits of Keynesianism which is not a debate I am interested in because stabilisation policy is not my field and I don’t find it very interesting, I got enough of it at university. I’m going to touch on a few points here, but I’m not going to engage fully with your argument; you really need to talk to a Keynesian macroeconomist if you want to discuss most of this stuff. For one thing my ability to taboo certain words is affected by the fact I don’t have a very solid grip on the theory and I don’t spend much of my time thinking about high level aggregates like GDP.
Now here’s the best I can do on your bullet point questions, sorry if it doesn’t help much, but it’s all I’ve got: 1) The difference is that Keynesians believe savings reduce the money supply by taking money out of circulation, this makes them think they are poorer, which makes them act like they’re poorer, which makes other people poorer.
2) Because it starts with an illusion of poverty. The first cause of recessions in a Keynesian model is “animal spirits”, or in layman’s terms, irrational fear of financial collapse. Viewed from this perspective, stimulus is a hack that undoes the irrationality that caused the problem in the first place (and because it’s caused by irrationality they can feel confident it is a problem).
3) This is actually one of my biggest problems with Keynesian theory. If it strikes you as counter-intuitive or silly, I’m not going to dissuade you.
One final point: The reason I replied to your initial comment in the first place, was your suggestion that all economists are obsessed with maximising measured GDP over everything else.
But many economists don’t deal with GDP at all. When I was learning labour market theory we were taught that once people’s wage rate gets high enough, one could expect them to work fewer hours since the demand for leisure time increases with income. There was never a suggestion that this was anything to be concerned about, the goal is utility, not income.
In environmental economics I recall reading a paper by Robert Solow (the seminal figure in the theory of economic growth) arguing that it was important to consider changes in environmental quality along with GDP, to get a better picture of how well off people really are.
I look at what I have been taught in economics, and I simply can’t square it with your view of the profession. Some kinds of economists tend to be obsessed with growth, but they tend to be economists who specialise in economic growth. The rest of us have other pursuits, and other obsessions.
Alright, I’ll let anyone judge for themselves if the canonical Keynesian replies reveal a truly grounded understanding of what counts as “helping the economy”.
Forget Keynesian theory for a minute: I want to know if you have the understanding I expect of whatever theory it is you do endorse. Can you taboo that theory’s terminology and ground it layperson level fundamentals? Can you force me to care about whatever jargon you do in fact use?
Because, at risk of sounding rude, I don’t think you’ve acquired this “Level 2” understanding, and I don’t think you’re atypical among economists in lacking it—from what I’ve read of Mankiw, Sumner, and Krugman, they don’t have it either.
(btw, you call yourself an economist but don’t have a grip on Keynesian theory? Isn’t that pretty much required these days?)
Sure—I only meant that economic policy advocates who are concerned about aggregate economic variables are obsessed with GDP as one of those variables, but that should be assumed from context. Obviously, you’re not going to care about GDP in your capacity as a microeconomist of company behavior.
On macro policy I doubt I have level 2 understanding. I had to take papers in macro at university, and I was able to get reasonable grades on them, but level 0 or 1 understanding is sufficient to do that.
My guess is that if you asked a Keynesian why they care, they would say that boom-bust cycles create uncertainty and fear in people because they don’t know if they’re going to lose their job (and they want their job, or they’d have already quit) and by taming the boom-bust cycle people will have a more certain and therefore more pleasant life).
Equally if you asked a development economist, they would point to the misery in third world countries and for wealthy countries point out that productivity growth means being able to do more with less, and whether you want to have more, or want to do less, that’s a win. Unemployed people are by definition people who want a job but don’t have one, so concern about unemployment is easy to work out.
And as for me, well the reason I care about allocative efficiency is that allocative efficiency is the attempt to match reality to people’s preferences as well as is possible under current constraints. How do we use our resources and knowledge to create the things people want and how do we get them to the people who want them the most?
The market does a pretty good job of this most of the time, but it does fail sometimes. And when it fails there are things government can do to improve matters, but the government can fail too, so you have to balance out the imperfections of the market and the imperfections of government and try to work out which set of imperfections is more problematic. If I succeed, or if people like me succeed then people will have more of what they want, be that flat screen TVs, or cars or clean air or time with their families. Not everything falls within economics’ purview of course, love and truth and beauty are things I can’t help with. But for everything else, my goal is to help the market to match infinite wants with finite resources, and imperfect information.
Perhaps it should have been, but I failed to assume this. And microeconomics is a lot wider than company behaviour, it covers pretty much everything but GDP and unemployment.
That wasn’t the question or contributory thereto, though it shows you can ground one concept.
The question is, whatever model/theory you have of the economy, are its predicates fully grounded in what laypersons care about? You mentioned things people care about, but not how they fit into the model that you advocate.
Allocative efficiency is what I work with. If you asked me why I care about GDP, my response would be, “I don’t, particularly”.
As for my economic model, I can’t give you a full rundown in a comment, but here’s the short version: 1) Level 1 is the fully ideal version, unrealistic, but useful for grounding the whole thing in people’s preferences. It basically rests on the notion that if you make a battery of assumptions voluntary exchange will result in allocative efficiency, if person A values something more than person B then they will trade, either directly or through side trades until person A has it. Yes there are a lot of reasons this doesn’t work in practice, but that’s level 2.
2) Level 2 picks at all those assumptions in level 1. Things like externalities (like pollution) imperfect information, irrational behaviour, imperfect competition, transaction costs and other git in the gears. These things cause violations of the assumptions in 1, and therefore prevent potentially efficiency-enhancing trades from occurring. The academic work at level 2 is focused around identifying these problems and considering possible solutions a government could introduce to correct for them.
3) Level 3 looks at the ability of government to effectively implement the policies identified at level 2. Theories like social choice theory (the ability of voting systems to effectively aggregate votes into social preferences) and public choice theory (how well do governments act as agents of the voting public). The academic work at level 3 is focused around identifying the limitations of real world governments, and identifying the side-effects of badly implemented policies.
Level 1 is all about individual preferences, not attempting to measure them directly because you can’t, but rather in setting up a system so people can sort it out themselves.
As for how GDP factors in, well they it doesn’t directly. Macro and micro aren’t integrated, they haven’t been since Keynes. You learn about them indifferent courses, people tend not to specialise in both, so there’s a gap there. Hence the reason I don’t care about GDP per se.
Now productivity I care about, because higher productivity means more resources for people to trade with and more preferences can be satisfied. I care about unemployment because it implies people are willing to make a trade, but unable to do so due to some bug in the system, either a level 2 problem (market failure), or a level 3 problem (government failure).