Zombie Criticisms of Keynes

Recently, a debate erupted between Austrians and Keynesians on Daniel Kuehn’s blog, and then later elsewhere, concerning matters that I, in my naivete, had long thought were settled. Sadly, it appears that once again, Henry Hazlitt’s supposed chapter by chapter ‘refutation‘ of TGT has been dredged up from the gutters of history, along with assertions about Keynes’ alleged totalitarianism.

I will start by briefly addressing some comments on Robert Vienneau’s previous exposition of Hazlitt’s book. There seems to be some confusion among the commenters who criticise Vienneau. It is quite clear that Hazlitt does not understand the concept of the marginalist supply curve, which posits that workers trade off leisure for work. Here he mistakenly asserts:

The ‘supply schedule’ of workers is fixed by the wage-rate that workers are willing to take. This is not determined, for the individual worker, by the ‘disutility’ of the employment – at least not if ‘disutility’ is used in its common-sense meaning.

He blatantly confuses the equilibrium between demand and supply with the curves themselves, an incredibly elementary mistake. Vienneau is correct to say that:

Obviously, then, the equality of the wage and the marginal productivity of labor is not enough to determine either wages or employment.

The marginalist theory require us to know both the wage rate  and the hours worked to determine employment. Do these people really expect us to take Hazlitt seriously when he can’t even describe the marginalist theory of employment?

Anyway, let’s move on to another section – hopefully everyone can agree that Liquidity Preference is central to Keynes’ theory, so I will focus on Hazlitt’s criticisms of this. Here is Keynes:

Thus the rate of interest at any time, being the reward for parting with liquidity, is a measure of the unwillingness of those who possess money to part with their liquid control over it.

Hazlitt begins with a typically snarky comment:

The economic system is not a Sunday school; its primary function is not to hand out rewards and punishments.

How petty. Keynes’ use of the word ‘reward’ is irrelevant in this case; he’s merely saying that interest is an incentive to get people to part with liquidity. Hazlitt is latching onto something quite meaningless here. Let’s continue:

If you wish to sell me tomatoes, for example, you will have to offer them at a sufficiently low price to “reward” me for “parting with liquidity”—that is, parting with cash. Thus the price of tomatoes would have to be explained as the amount necessary to overcome the buyer’s “liquidity-preference” or “cash preference.”

Keynes is obviously saying that cash has a role as a store of value as well as a medium of exchange. If it is not currently being used for the latter then it will be stored; should it be stored, a certain rate of interest will be necessary to make the buyer part with their liquidity and buy a bond or deposit it in a bank. Hazlitt completely fails to distinguish between the two uses and offers up a false equivalence based on this misunderstanding.

Hazlitt then appears to agree with Keynes for a while:

[People] hold cash (beyond the needs of the transactions-motive) because they distrust the prices of investments or of durable consumption goods; they believe that the prices of investments and/or of durable consumption goods are going to fall, and they do not wish to be caught with these investments or durable goods on their hands.

Here Hazlitt isn’t actually criticising Keynes at all, but simply restating his theory of the speculative motive. He tries to paint this as a disagreement by splitting hairs over the word ‘speculative’ – which is fairly typical of the blunderbuss contrarianism you will find throughout his book – but it’s quite clear that this is simply a restatement of Keynes.

Hazlitt goes on:

If Keynes’s theory were right, then short-term interest rates would be highest precisely at the bottom of a depression, because they would have to be especially high then to overcome the individual’s reluctance to part with cash—to “reward” him for “parting with liquidity.” But it is precisely in a depression, when everything is dragging bottom, that short-term interest rates are lowest.

That interest rates move pro-cyclically is no sufficient to disprove the LP theory of interest, as it is not the only factor determining the interest rate – in a boom demand rises and this pushes up interest rates; the latter happens in a depression. This is entirely compatible with Keynes’ economics and does not mean LP effects are absent or unimportant.

It is worth noting at this point that Keynes was mostly concerned with long term rates, which are what businesses actually use when making investment decisions. To this end, Hazlitt resumes agreeing with Keynes:

It is true that in a depression many long-term bonds tend to sell at low capital figures (and therefore bear a high nominal interest yield), but this is entirely due, not to cash preference as such, but to diminished confidence in the continuation of the interest on these bonds and the safety of the principal.

Right, in other words: their preference for cash or liquidity over more uncertain bonds. Which is what Keynes said.

As a brief note on Keynes totalitarianism: this seems to be based on Keynes mentioning several times that certain policies – both flexible wages (of which he disapproved) and various exchange rate mechanisms & capital controls, as well as active fiscal & monetary policy (of which he approved) – are more easily applied under totalitarian conditions. These observations are quite clearly true –  any economic policy, implemented word for word, is easier to apply under totalitarian conditions. This does not mean that totalitarianism is desirable, and you will not find Keynes saying anything of the sort. Furthermore, even if he did say such things, this is irrelevant to his economics.

There are good criticisms of Keynes to be made, but you will not find them with the likes of Hazlitt and Rothbard, who were quite clearly motivated by an overarching desire to ‘own’ Keynes, rather than debate. Rothbard actually wrote an entire book attacking Keynes as a person, which really is all you need to know about what he had to say. These people were not scholars, and their work is best consigned to the dustbin of history.

Addendum: Daniel Kuehn strengthens the argument about Keynes’ preface to the German edition of TGT.

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  1. #1 by 孟虎 on June 16, 2012 - 2:20 pm

    Zombie criticism of Hazlitt. You show us “what you want us” to see.
    I note how you did not address this post. Even worse, you totally ignore Raoul’s comment.

    http://mises.org/Community/forums/p/29610/474744.aspx

    And this : “Regarding the liquidity preference, see de Soto’s book, page 550 (footnote 63), page 562 (footnote 77).”

    And please, stop speaking of Hazlitt as if you had read his book. If *that* is the best criticism of Hazlitt Keynesians can make, your side is in more trouble than I thought.

    • #2 by Unlearningecon on June 16, 2012 - 10:14 pm

      There is a lot of discussion and I can’t be expected to respond to all of it straight away!

      Also, you’ll have to do better smug ‘haha, you call THAT an argument??’ catch alls with no substance, and links to other people’s arguments. Make some yourself.

      If you think I ‘showed you what I wanted you to see’, please point out where I misrepresented Hazlitt. I skipped commenting on some parts, but they are mostly the parts where he focuses on being condescending about Keynes’ wording.

      I readily acknowledge I haven’t read the whole book, but I have certainly read the parts I’ve commented on, and they were not sufficient to convince me to read the rest.

    • #3 by 孟虎 on June 16, 2012 - 11:18 pm

      I provided you a link…
      There is no need to discuss further with you when
      1) you ignore Raoul’s comments
      2) you don’t want to have a look on the references and links I recommended you before.

      Again, read this.

      http://mises.org/Community/forums/p/29610/474744.aspx

      • #4 by Unlearningecon on June 16, 2012 - 11:36 pm

        It’s late and I plan to respond to Rauol tomorrow, as his comments are worthy of lengthier consideration.

        I will look over some of them in time. But you are not debating me properly, instead relying on referring me to the opinions of others. There are hundreds of articles and books I could dismissively refer you to, but I like to make arguments myself, which is how debate is actually supposed to happen.

        I ctrl+ f’d liquidity preference and that guy deals with it very briefly. I don’t understand why you think Hazlitt drawing an equivalence between bonds and cash is a good argument, as it completely fails to grasp the basic idea of liquidity preference, which is that people hold cash in the face of uncertainty, sometimes over future bond yields. Hazlitt agrees with this point elsewhere, as pointed out above!

        Austrians also appear to have conceded that Hazlitt did not understand what the labour supply curve was. From what I know, things do not look good for his book.

      • #5 by 孟虎 on June 17, 2012 - 12:13 am

        “instead relying on referring me to the opinions of others”

        I’ll make it clear. The link to the mises community is a post … of mine.

      • #6 by Unlearningecon on June 17, 2012 - 11:14 am

        Be that as it may, you should bring your arguments, along with new ones, here, instead of referring people back to lengthy posts.

  2. #7 by 孟虎 on June 16, 2012 - 2:36 pm

    To quote Huerta de Soto :

    63. Jacques Rueff has pointed out that in an economy on a pure gold standard, an increase in the demand for money (or “hoarding”) does not push up unemployment at all. In fact, in accordance with the price system, it channels a greater proportion of society’s productive resources (labor, capital equipment, and original means of production) into the mining, production, and distribution of more monetary units (gold). This is the market’s natural, spontaneous reaction to economic agents’ new desire for higher cash balances. Therefore it is not necessary to initiate a program of public works (even if, as Keynes ironically remarked, it consisted merely of digging ditches and then filling them in again), since society will spontaneously use its productive resources to dig deeper mines and extract gold, thus more effectively satisfying the desires of consumers and economic agents for higher cash balances. Hence an increased “liquidity preference” cannot possibly produce a situation of permanent, combined equilibrium and unemployment. A combination of equilibrium and unemployment can only stem from a rigid labor market in which the coercive power of the state, the unions or both, prevents flexibility in wages and other employment contract and labor market conditions. See Jacques Rueff’s article, “The Fallacies of Lord Keynes’ General Theory,” printed in The Critics of Keynesian Economics, Henry Hazlitt, ed. (New York: Arlington House, 1977), pp. 239–63, esp. p. 244.

    77. This is not the appropriate place to carry out an exhaustive analysis of the rest of the Keynesian theoretical framework, for instance his conception of the interest rate as a strictly monetary phenomenon determined by the money supply and “liquidity preference.” Nonetheless we know that the supply of and demand for money determine its price or purchasing power, not the interest rate, as Keynes maintains, concentrating merely on the effects credit expansion exerts on the credit market in the immediate short term. (Besides, with his liquidity preference theory, Keynes resorts to the circular reasoning characteristic of the functional analysis of mathematician-economists. Indeed first he asserts that the interest rate is determined by the demand for money or liquidity preference, and then he states that the latter in turn depends on the former.) Another considerable shortcoming of Keynesian doctrine is the assumption that economic agents first decide how much to consume and then, from the amount they have decided to save, they determine what portion they will use to increase their cash balances and then what portion they will invest. Nevertheless economic agents simultaneously decide how much they will allot to all three possibilities: consumption, investment and the increase of cash balances. Hence if there is a rise in the amount of money each economic agent hoards, the additional amount could come from any of the following: (a) funds previously allocated for consumption; (b) funds previously allocated for investment; or (c) any combination of the above. It is obvious that in case (a) the interest rate will fall; in case (b) it will rise; and in case (c) it may remain constant. Therefore no direct relationship exists between liquidity preference or demand for money and the interest rate. An increase in the demand for money may not affect the interest rate, if the relationship between the value allotted for present goods and that allotted for future goods (time preference) does not vary. See Rothbard, Man, Economy, and State, p. 690. A list of all relevant critical references on Keynesian theory, including various articles on its different aspects, appears in Dissent on Keynes: A Critical Appraisal of Keynesian Economics, Mark Skousen, ed. (New York and London: Praeger, 1992). See also the previously cited chapters 7–9 of Garrison’s Time and Money.

  3. #8 by Baraglioul on June 16, 2012 - 8:50 pm

    ” There seems to be some confusion among the commenters who criticise Vienneau. It is quite clear that Hazlitt does not understand the concept of the marginalist supply curve, which posits that workers trade off leisure for work.”

    I’m dreaming…! It’s exactly the reverse! From the beginning, I emphatically point out that Hazlitt is wrong when he writes the “disutility concept” is of no use in order to determinate wages. I have even told you directly at Kuehn’s!

    How can you assert that “the commenters who criticise Vienneau”—that is, I and my friend Meng Hu—are in “confusion” because “Hazlitt does not understand the concept of the marginalist supply curve, which posits that workers trade off leisure for work”? It’s exactly the flaw I was emphasizing!

    Nevertheless, Hazlitt is almost right. He should only have specified the disutility doesn’t have a direct role in determining the wages. The marginal productivity of labor (i.e., the “1st postulate”) is enough to do so. The disutility (i.e., the “second postulate”) has an impact on the wages rates, as any cost of production has, but only in an indirect way: it regulates the volume of would-be laborers, which, in turn, has an impact on the marginal productivity of labor, and, eventually, on the wage rates. So the disutility of labor is not an independent factor determining the wages; it works through the marginal productivity. So Keynes and Vienneau are more wrong than Hazlitt.

    Moreover, as I have also already made you notice, Keynes partly believes in a cost-of-production theory. It’s clearly contradictory with the MVP theory.

    • #9 by Unlearningecon on June 17, 2012 - 11:21 am

      I know that you acknowledged this fault, but the post is already esoteric and long so I didn’t want to put ‘oh by the way Raoul, I know you get this.’

      ‘Almost right’ isn’t good enough if you are trying to directly refute a book that is (supposedly) the cornerstone of modern macro. You’ve said many times that you agree with a lot of the criticisms, so why do you continue to argue the toss? Why is it so important that Hazlitt is somehow right and Keynes is somehow wrong?

      Keynes states the supply and demand schedule for workers correctly. He speaks of the “volume of employed resources”, which obviously requires both hours worked and wage rates to be determined. This really is simple stuff, but Hazlitt comes along and muddies the waters – you then concede he’s wrong, but continue to muddy them in the name of god knows what.

      • #10 by Raoul on June 17, 2012 - 4:22 pm

        I know that you acknowledged this fault, but the post is already esoteric and long so I didn’t want to put ‘oh by the way Raoul, I know you get this.’

        I didn’t merely “acknowledge” this flaw, I actively directed my readers’ attention on it. The fact that you mention a flaw that I was precisely pointing out shows that such defects aren’t very numerous in Hazlitt’s book. Moreover, you didn’t only abstain from putting “Raoul, I know you get this”, you squarely wrote “There seems to be some confusion among the commenters who criticise Vienneau”, which means “Raoul don’t get this”. Anyway.

        ‘Almost right’ isn’t good enough if you are trying to directly refute a book that is (supposedly) the cornerstone of modern macro.’ You’ve said many times that you agree with a lot of the criticisms, so why do you continue to argue the toss? Why is it so important that Hazlitt is somehow right and Keynes is somehow wrong?

        It’s largely enough. Firstly, because, even if Hazlitt is not perfect, Keynes, as I have already emphasized, is still worse. Secondly, and it’s the core of my response to this point, I don’t defend Hazlitt as a great theorist. I believe nobody does. It was not his job. I defend him as a great critic of the GT. So, you can’t confine yourself to write that Hazlitt’s ideas on economic principles aren’t perfect. You must address his main hits against Keynes—as you do (or, in my opinion, try to do) with the liquidity preference concept. On the contrary, if you write a critique of Economics in One Lesson, you can directly attack Hazlitt on his basic ideas. Personally, I don’t like this latter book.

        Incidentally, I haven’t said that I agreed with “a lot of criticisms”. I admit that there’s a flaw in his first chapter, and I formulate some additional criticisms from the Austrian of view; for instance, that Hazlitt fails to see that interest isn’t only a “contractual” phenomenon. His attack against the LP concept is weakened by this failure, but is still largely right.

      • #11 by Unlearningecon on June 19, 2012 - 4:07 pm

        Meng Hu did not seem to share your view on the supply schedule, and that was to whom I’m referring. Anyway, not important..

        You are a magnitude of order more reasonable than Hazlitt or Rothbard, so it confuses me that you side with them at all. But you must understand why I consider them unworthy of further study.

        To claim you have ‘refuted’, almost sentence by sentence, any academic work is a ridiculous proposition, let alone one as celebrated as TGT. This would apply even if TGT were broadly wrong – as you correctly note, the best way to better your opponents is to attack his main ideas rather than take the approach Hazlitt did. Honestly, his entire approach just strikes me as juvenile, and the snark and pedantry don’t help to this end. A book like TGT can’t just be ‘wrong’ in the way many Austrians appear to wish it were – at the very least, it will introduce some useful concepts and frameworks. Hazlitt, as he was not a true scholar, did not appreciate this. Rothbard had a similar attitude (as you can see from his foreword).

      • #12 by Raoul on June 17, 2012 - 4:33 pm

        Keynes states the supply and demand schedule for workers correctly. He speaks of the “volume of employed resources”, which obviously requires both hours worked and wage rates to be determined.

        Are you now admitting that the MVP is enough to determine the wages?

        Here Keynes speaks of the “”volume of employed resources”. But elsewhere, he writes that, according to the classical theory, “real wages are always equal to the marginal disutility of labor” (chapter 20, I). Beside, Vienneau wrote—and you quote him approvingly—, that “ Obviously, then, the equality of the wage and the marginal productivity of labor is not enough to determine either wages or employment.

        Now, I think I have already demonstrated that the MVP theory is enough to determine the wages, and that the disutility of labor is not an independent factor. But what about the “volume of employment”, or the “volume of employed resources”?

        Firstly, it’s an absolutely uninteresting issue. Economics, indeed, has almost nothing to say about it—about this volume as such. Indeed, if you ask this question to a classical economist, “what determines the volume of employment ?”, he will answer you “in a free market, the quantity of would-be employees”. That’s all. To this quantitative problem a quantitative answer is given. The issue economics has to deal with is “what causes the involuntary unemployment”? This is a qualitative question, and the interested one.

        But Keynes shamelessly tries to obscure it in two ways.

        Firstly, by saying that unemployment resulting from legislation and from union pressure is voluntary (chapter 2, I). It’s a clear reversal of the usual sense of the words, and it is obviously intended to deceive the reader.

        Secondly, he makes a very wrong use of the concept of “disutility”. Indeed, while this concept only states that the going hourly wage is not enough to led the laborer to work one more hour (I insist, an once more hour) than he actually does, Keynes writes as if the hourly wage was just sufficient to induce the laborer to work the first hour, i.e. to work at all!

        Sometimes, it does happen that the individual marginal disutilities of labor (and the rates of the wages) impact the volume of (un)employed people. But this impact is very limited. Few are the people who voluntarily and completely refuse to work because the offered wage is not sufficient. Few can abstain from working.

        The individual marginal disutilities of labor (and the rate of the wage) mainly impact the volume of hours worked.

        So, the “second postulate”—namely, that “The utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment”—is true only if “volume of labour” means “volume of hours labored”. But it seems that Keynes refers to the “volume of employed persons”.

        In the beginning of the definition of the “second postulate” he gives in the second chapter, it’s ambiguous. Is he speaking of the volume of the worked hours, or of the employed people?

        He begins by speaking about “an” employed person, but, ere, he speaks about “the employed persons” (plural) and of “the volume of labour actually employed”. Anyway, in the following chapters, it becomes clear that he speaks about the “volume of employed persons”. For instance, he writes “until real wages have fallen to equality with the marginal disutility of labour, at which point there will, by definition, be full employment” (chapter 20; by “full employment”, he doesn’t mean “people will work 24 hours per day), and “Let us assume, for the moment, that labour is not prepared to work for a lower money-wage and that a reduction in the existing level of money-wages would lead, through strikes or otherwise, to a withdrawal from the labour market of labour which is now employed. Does it follow from this that the existing level of real wages accurately measures the marginal disutility of labour?” (Chapter 2; the purpose of a strike is to abstain entirely from working, and not to abstain merely from working additional hours).

        On the contrary, on a hampered economy, the rate of wages has an important impact on the volume of employed people. Indeed, government or government-sponsored unions prevent would-be laborers from working below a definite hourly wage. So, in this situation, the rate of wages has an important impact on the volume of employed people. Actually, in a hampered market, it’s not really an issue of “disutility” of labor, because the “refuse” of working is a forced one, but Keynes defines the “disutility” in such a way that it can include the “forced disutility”.

        Keynes’ purpose is to confuse the two issues. Hazlitt is right in often criticizing his vocabulary.

  4. #13 by Raoul on June 16, 2012 - 9:00 pm

    [The previous comment signed ‘Baraglioul’ is mine]

    Keynes is obviously saying that cash has a role as a store of value as well as a medium of exchange. If it is not currently being used for the latter then it will be stored; should it be stored, a certain rate of interest will be necessary to make the buyer part with their liquidity and buy a bond or deposit it in a bank. Hazlitt completely fails to distinguish between the two uses and offers up a false equivalence based on this misunderstanding.

    Are you really telling me that, when you “buy a bond”, you are not using the cash as a “medium of exchange”??

    As Hazlitt specifies it, the “store of value function” is only a derivate from the “medium of exchange function”. If the fiat money were not a “(generally accepted) medium of exchange”, it could not be a “store of value”. Anyway, any non perishable good is a “store of value”; and because some goods are less perishable than the money, they are better “stores of value” than this latter. As a result, you can’t base any sound monetary theory on the “store of value function”.

    Actually, the “two-steps process of decision” theory is deeply flawed. There’s absolutely no reason why the actor should not take into consideration the so-called “second decision” when he’s doing the “first”. What’s more, Keynes only asserts this theory; he doesn’t give any argument for its support.

    Beside, even if the “two steps” theory were true, the “second decision” is badly formulated. Keynes arbitrarily asserts than the only available choices are “to keep the saving in cash” and “to buy a bond”. Now, you could also buy shares, or invest directly in factors of production. Shares and direct investment are “savings” as well. But if you agree with this fact, the whole theory appears to be wrong, because Keynes refuses to admit that the interest and the “marginal efficiency of capital” are the same phenomenon.

    Moreover, the liquidity preference theory fails to solve the question that a sound theory of interest has to resolve, namely: why does the cumulative price of the factors of production fall short from the price of the final product?

    • #14 by 孟虎 on June 16, 2012 - 11:31 pm

      Raoul,

      “If the fiat money were not a “(generally accepted) medium of exchange”, it could not be a “store of value”.”

      Exactly. And to quote Mises himself.

      Money is a medium of exchange. It is the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange. Money is the thing which serves as the generally accepted and commonly used medium of exchange. This is its only function. All the other functions which people ascribe to money are merely particular aspects of its primary and sole function, that of a medium of exchange. (Human Action, p. 398)

    • #15 by 孟虎 on June 16, 2012 - 11:59 pm

      “Keynes refuses to admit that the interest and the “marginal efficiency of capital” are the same phenomenon”

      I must add. The interest rate, according to Keynes, is not influenced by expectations, while the marginal efficiency of capital is indeed influenced by such expectations. To quote Hazlitt, once again :

      “Keynes’s admissions here are quite correct. “If the rate of interest were to rise pari passu with the marginal efficiency of capital, there would be no stimulating effect from the expectation of rising prices.” But what is Keynes’s reason for supposing that the rate of interest will not rise with the marginal efficiency of capital? It lies in his assumption that “the marginal efficiency of capital” embodies expectations and that the rate of interest does not. The marginal efficiency of capital, by Keynes’s order, has entered the realm of “dynamic” economics, but the rate of interest, also by Keynes’s order, has been kept in the realm of “static” economics.

      […] If the marginal efficiency of capital embodies expectations, so do interest rates. To assume otherwise is to assume that entrepreneurs are influenced by their expectations but that lenders are not. … And, according to Keynes, the lenders will be perfectly agreeable to this. They will not demand a higher interest rate as an insurance premium against the depreciated dollars in which they expect to be repaid.” [p. 163-164]

    • #16 by Unlearningecon on June 17, 2012 - 11:37 am

      You are correct that the store of value function is derivative, but this doesn’t impact the analysis.

      Anyway, any non perishable good is a “store of value”; and because some goods are less perishable than the money, they are better “stores of value” than this latter.

      No, because money is the most liquid asset. This is Keynes’ entire point! I don’t understand why this has to be so difficult.

      Allow me to restate my point more effectively. For Keynes, investment decisions had to be sufficient to reward people for parting with their liquidity in the face of uncertainty. This drives up the rate of interest, particularly long term rates (a phenomenon noted by Hazlitt). You are correct to note that the MEC is a flawed or incomplete concept, and it is a residue of Keynes failing to escape neoclassical economics completely (you will find these throughout the book).

      Moreover, the liquidity preference theory fails to solve the question that a sound theory of interest has to resolve, namely: why does the cumulative price of the factors of production fall short from the price of the final product?

      Unless I have completely misinterpreted you, this seems like a question with an infinite amount of answers, profit being the obvious one.

      • #17 by Raoul on June 17, 2012 - 5:27 pm

        No, because money is the most liquid asset.

        Large liquidity is the quality of good medium of exchange, not of a good store of value. To invest in Paris real estate is, so far, a very good store of value, but it’s not very liquid. To invest in Zimbabwe’s currency, or even in euro, is to acquire a liquid thing, but not a very good store of value. But that’s not a very important point.

        You are correct to note that the MEC is a flawed or incomplete concept, and it is a residue of Keynes failing to escape neoclassical economics completely…

        I was not aware Keynesians criticize this concept. Could you tell me the reasons why you (and other Keynesians) attack it?

        Unless I have completely misinterpreted you, this seems like a question with an infinite amount of answers, profit being the obvious one.

        I think that you correctly interpreted me, and that you partly answered on the track. “Profit” is a possible answer. It is said that’s Schumpeter’s answer. To be exact, this answer implies that there’s no issue to be resolved. Indeed, it means that, in the imaginary construction of the Evenly Rotating Economy, where by definition profits are eliminated, there would be no longer any difference between the cumulative price of the factors of production and the price of the final product. But such an absence of difference is inconceivable. Indeed, in the ERE, the capital structure must be maintained, but how could it be possible if capitalists don’t receive any income? If they don’t receive any income, they will stop to repair the structure and they will consume their capital. It’s why the Austrians say that there must still be a price spread in the ERE; and they explain this difference by saying that, because of time preference, a present satisfaction is always preferred to a future one, and that, as a consequence, capital goods, which are only way stations toward the consumption good, are less valued that the latter.

        What are the other answers possible, in your opinion?

        You have not answered to some of my objections:

        1° Are you really saying that, when you “buy a bond”, you are not using the cash as a “medium of exchange”? If you aren’t, how can you continue to oppose the “medium of exchange function” and the “store of value” function?

        2° How do you demonstrate the truth of the “the “two-steps process of decision”? As Rothbard put it (not an ad hominem attack), “To say that people first decide between consuming and not consuming and then choose between hoarding and investing is just as misleading as to say that people first choose how much to hoard and then decide between consumption and investment”.

        3° Is the second decision limited to a choice between “to keep the cash” and “to invest in bonds”, or can the actor also invest in shares and, above all, in direct factors of production? Keynes seems to refer only to the bonds (“For the rate of interest is, in itself, nothing more than the inverse proportion between a sum of money and what can be obtained for parting with control over the money in exchange for a debt[footnote] for a stated period of time.” Chapter 13, II). It’s as much a question as an objection.

        4° Bank deposits and some bonds are both liquid and income-productive. How do you conciliate this fact with Keynes’ theory? (It’s an objection I mentioned at Vienneau’s). The previous footnote doesn’t seem to answer this point.

      • #18 by Unlearningecon on June 19, 2012 - 3:51 pm

        The MEC was a remnant of the orthodoxy from which Keynes struggled to escape. Here is Keynes in his 1937 summary of his book:

        It is true that the necessity of equalizing the advantages of the choice between owning loans and assets requires that the rate of interest should be equal to the marginal efficiency of capital. But this does not tell us at what level the equality will be effective. The orthodox theory regards the marginal efficiency of capital as setting the pace. But the marginal efficiency of capital depends on the price of capital-assets; and since this price determines the rate of new investment, it is consistent in equilibrium with only one given level of money-income.

        As you can see this has echoes of Sraffa. LK notes that Joan Robinson considered the MEC a faulty concept.

        1. Whilst the SoV function is derived from the MoE function, I think distinguishing the two for the purposes of the liquidity preference argument has merit. The MoE function is generally synonymous with money being a ‘veil’ over barter, which was something Keynes was questioning. The SoV role creates its own effects and it is worth separating these for formal analysis; furthermore, I think that functionally money is experienced differently in the two cases.

        2. Rothbard’s first postulate does not strike me as ridiculous at all; his second does. Generally, people consume some of their income and save some of it – from there they make decisions about what exactly to do with the savings.

        Having said that, I think this misses the point. Liquidity preference mostly concerns investors rather than ‘ordinary’ consumers – money is their fallback as the most safe, liquid asset available.

        3. You are right that shares are another option. Does LP have an influence on these, too? I don’t see why it wouldn’t, but by my reckoning shares are so frequently traded and so much more prone to fluctuation that the LP effect would be swamped. Investment in direct factors of production is comparatively rare so I don’t think the effects are as significant.

        4. Money is the most liquid, most safe asset of them all, though. This is what gives it its status. It’s undeniable that corporations are currently hoarding cash.

        I’m not sure where you’re going with discussion of ERE – we seem to be getting off track there?

      • #19 by 孟虎 on June 19, 2012 - 6:12 pm

        “Generally, people consume some of their income and save some of it – from there they make decisions about what exactly to do with the savings.”

        That’s arbitrary and caricatural. People simply make a decision on all these alternatives. They weigh one against each of the others.

        “Money is the most liquid, most safe asset of them all, though. This is what gives it its status. It’s undeniable that corporations are currently hoarding cash.”

        You did not address his point. He said : “Bank deposits and some bonds are both liquid and income-productive.
        One problem with the liquidity preference is its failure to recognize the utility of the demand for money. The demand for money is not a demand “for nothing”. This demand will tend to divert to the fabrication of money or other commodities that can be served as a medium of exchange. See also.

        “so it confuses me that you side with them at all”

        Because he knows Hazlitt and Rothbard better than you.

        “Meng Hu did not seem to share your view on the supply schedule”

        Please, cite me.

      • #20 by Unlearningecon on June 19, 2012 - 9:20 pm

        That’s arbitrary and caricatural. People simply make a decision on all these alternatives. They weigh one against each of the others.

        We’re just making unsupported assertions at each other and I’m not sure of any empirical evidence (or even possible empirical evidence) that would settle this. In any case, as I said below, liquidity preference considerations are not mainly concerned with ‘ordinary’ people, but investors & capitalists.

        You did not address his point. He said : “Bank deposits and some bonds are both liquid and income-productive.”

        Yep, but money is more liquid and more safe, so in the face of uncertainty will be preferred.

        As for your comments on LP: we aren’t on a gold standard, so that discussion is irrelevant.

        Please, cite me.

        Again, it seems to me that he has strayed completely. Hazlitt was entirely correct. The fact is that the first postulate (’The wage equals the marginal productivity of labor’) indicates precisely the spot where the labor market is in equilibrium.

      • #21 by 孟虎 on June 19, 2012 - 10:37 pm

        Yep, but money is more liquid and more safe, so in the face of uncertainty will be preferred.

        You should in that case try to explain why in a depression short-term interest rates are the lowest, and why in a recovery and at the peak of the boom short-term interest rates are the highest.

        we aren’t on a gold standard

        No, but that doesn’t refute my point : “The demand for money is not a demand “for nothing”. This demand will tend to divert to the fabrication of money or other commodities that can be served as a medium of exchange.”

        For the quote, I would mean that the 2nd postulate is already included in the first. This is probably what Hazlitt meant. I recognize however that this phrase … “The “supply schedule” of workers is fixed by the wage-rate that workers are willing to take. This is not determined, for the individual worker, by the “disutility” of the employment — at least not if “disutility” is used in its common-sense meaning” … is a little confusing.

      • #22 by Unlearningecon on June 20, 2012 - 8:48 am

        I already addressed that in my post! That there are other effects does not disprove the LP theory, and note that Keynes was mostly concerned with long term rates, something Hazlitt seems to agree on.

        You seem to be suggesting that demand for money will create demand for other mediums of exchange elsewhere. This is quite a big claim and doesn’t really seem to make sense in a monetary economy with only one accepted currency.

      • #23 by 孟虎 on June 19, 2012 - 10:39 pm

        (the “quote” function doesn’t work…)

    • #24 by BruceMcF on June 20, 2012 - 1:34 am

      “Are you really telling me that, when you ‘buy a bond’, you are not using the cash as a ‘medium of exchange’??”

      Yes! Quite obviously, “trading” “M” today with the promise of more “M” tomorrow is not an exchange in the sense of a medium of exchange in current transactions, where “M” is traded for “X”, “Y” and “Z” today, and that completes the trade.

    • #25 by 孟虎 on June 20, 2012 - 10:36 am

      BruceMcF,
      “Quite obviously, “trading” “M” today with the promise of more “M” tomorrow is not an exchange in the sense of a medium of exchange in current transactions”

      Paul buys a bond from Jack. Paul has the bond, Jack the money. And Jack will buy some products, say, X, Y, or Z with that money.

      Unlearning,
      “This is quite a big claim and doesn’t really seem to make sense in a monetary economy with only one accepted currency”

      There can’t be “only one accepted currency” except with legal tender laws.

  5. #26 by Raoul on June 16, 2012 - 9:23 pm

    Furthermore, even if he did say such things, this is irrelevant to his economics.”

    I’m sorry, but it’s a very relevant. Economics and politics are very closely connected. Both deal with the role of violence in society. To know the political idea of an economist is thus very important—still more when, as Keynes does, this economist advocates to grant large powers to people like him in order to rule the economy. Moreover, it’s not criminal to write about economic history and the life of the famous economists.

    It’s not as if some elements of Keynes’ private life were raised against his economic theory. An artist’s political opinions don’t affect the quality of his art. But an economist’s political opinions do throw light on his theory.

    Moreover, the famous German preface was a public text; it’s was not a personal paper published after Keynes’ death and without the latter’s assent. If it was a private paper, the ambiguities could rightly be interpreted in favor of the Keynes; indeed, the author wouldn’t have any need to “hide” is real thought.

    But, the German preface was a public text, and, moreover, dealt with a very fiendish topic. So, we could fairly assume that Keynes was somehow voluntary throwing obscurity on his words. It’s why the (so slight) ambiguity of his words can’t be used to exculpate Keynes from the apparent meaning of the text.

    • #27 by Daniel Kuehn on June 16, 2012 - 9:33 pm

      There’s nothing obscure about his words. You obscure it by reading two sentences out of context.

      • #28 by Raoul on June 16, 2012 - 9:59 pm

        I agree that there’s not a lot of obscurity. But not in the same sense than you. Nevertheless, I will answer you directly on your blog.

        Regarding the two sentences that I quote on your original post, I would onlt make you notice that I don’t misinterpret them as you think—maybe I misinterpret them, but not as you think.

        Indeed, I have plainly seen that the literal meaning is that Keynes rejects theses solutions. I don’t assert he embraces them.

        But I would direct your attention on the reasons why Keynes rejects theses solutions.

        He rejects them essentially because the conditions are not met for their success, and not because they are intrinsically bad or immoral. Indeed, he writes that these solutions could succeed only in an authoritarian state. Now, as Keynes doesn’t live in such a state, he rejects them as unfitted. He doesn’t say if they are or not immoral. I think this is the literal sense of theses sentences.

        Now, I wrote on your blog, before to quote the two sentences, what I think of them: “In the same way, Keynes expressed often, in a barely hidden manner, that the things would be simpler for him and for the other officials if we lived in an authoritarian state.

        I guess you won’t agree with this interpretation. Yet, it shows clearly that I don’t construe Keynes’ words as an direct and literal embracement of the concerned solutions.

        I somehow regret you didn’t have quoted these words of mine in your late post.

    • #29 by Raoul on June 17, 2012 - 5:28 pm

      To read “last post”, and not “late post”, of course.

  6. #30 by Alex on June 21, 2012 - 3:25 pm

    The issue of why you can’t buy shares in the Keynesian example is a red herring. It’s quite a simple two-good model – you have two choices, cash or bonds, which differ in their liquidity and their interest rate. how much interest is worth less liquidity?

    Now, consider a financial product intermediate between the two, like a notice-required savings account. It’s not as liquid as cash because you can’t get at it without giving 7 days’ notice. In return, it pays a better interest rate than a current account and of course a better one than a pile of banknotes, but not as much as a bond that locks up your capital for a year.

    Does the model break? Of course not. It’s perfectly possible to represent a choice between several options on a spectrum using a two good model. And you can go on. Cash in my pocket is 100% liquid. Even though I can draw more of it instantly from an ATM, I still need to go to the ATM and it’s possible that it might not be working.

    With regard to shares, even though they can always be sold, I would need to call my broker and pay their commission to sell, and then wait for the cash to reach my bank account, and of course the value of shares is what it is at the moment someone’s SQL query commits. (In theory, I could offer you the portfolio as a swap for a round of drinks, but that’s a classic example of getting a terrible price as a forced seller in a highly illiquid market.)

    So I’m still choosing to forego some liquidity in exchange for higher returns, and we can plot a line on the chart linking combinations of liquidity and interest I consider acceptable. (In the example of cash on the hip vs. cash in the bank, of course I’m primarily exchanging liquidity for safe deposit, but you can treat the expected loss rate to thieves as a negative interest rate if you like.)

  7. #31 by Raoul on June 22, 2012 - 6:06 pm

    The MEC was a remnant of the orthodoxy from which Keynes struggled to escape. Here is Keynes in his 1937summary of his book:
    ‘It is true that the necessity of equalizing the advantages of the choice between owning loans and assets requires that the rate of interest should be equal to the marginal efficiency of capital. But this does not tell us at what level the equality will be effective. The orthodox theory regards the marginal efficiency of capital as setting the pace. But the marginal efficiency of capital depends on the price of capital-assets; and since this price determines the rate of new investment, it is consistent in equilibrium with only one given level of money-income’.

    It’s not correct to say that “the marginal efficiency of capital depends on the price of capital-assets” and that “this price determines the rate of new investment”. Investors aren’t interested in the price of assets, but in the price spread between assets of various levels. Investors aren’t benefited by the increase in their selling unless their buying prices remain the same. So it’s wrong that equilibrium is consistent with only one “given level of money-income”, because changes in money incomes produce changes in both factors of production and final goods prices, so that, Cantillon effect set aside, the “marginal efficiency of capital” (or any similar concept) remains unchanged.

    . Rothbard’s first postulate does not strike me as ridiculous at all; his second does. Generally, people consume some of their income and save some of it – from there they make decisions about what exactly to do with the savings.

    I don’t understand how you can severe the first choice from the second one in Rothbard’s example. If you accept the first (how much to hoard?), the second necessarily follows (what to do with the money you needn’t hoard?).

    Having said that, I think this misses the point. Liquidity preference mostly concerns investors rather than ‘ordinary’ consumers – money is their fallback as the most safe, liquid asset available.

    Keynes doesn’t seem to focuse on investors. Indeed, in the chapter 13, he refers to “an individual” and to “the public”.

    Beside, are you saying that all the process concerns only the investors, or that the first decision is taken by the “ordinary” consumers, and the second, by the investors?

    What’s more, whether individuals keep their money under the mattress/in a sight deposit or in savings accounts is not immaterial.

  8. #32 by Raoul on June 22, 2012 - 6:08 pm

    You are right that shares are another option. Does LP have an influence on these, too? I don’t see why it wouldn’t, but by my reckoning shares are so frequently traded and so much more prone to fluctuation that the LP effect would be swamped. Investment in direct factors of production is comparatively rare so I don’t think the effects are as significant.

    The issue is about essence, not about practical considerations. If the interest and the “MEC” (or any other similar concept) are determined by the same cause, they must be the same phenomenon. And that’s what Keynes denies.

    I’m not sure where you’re going with discussion of ERE – we seem to be getting off track there?

    I was saying that 1° the price spread is different from the profit, because the former must exist even when the latter disappears, and 2° the task of a sound theory of interest is to explain this phenomenon and 3° the LP doesn’t address this issue.

  9. #33 by Raoul on June 22, 2012 - 6:12 pm

    We’re just making unsupported assertions at each other and I’m not sure of any empirical evidence (or even possible empirical evidence) that would settle this”.

    The difficulty is that this unsupported assertion is the base of your theory, whereas 孟虎 is mainly saying it isn’t possible to build up any theory with such an unsupported assertion.

    Now, I don’t think any empirical evidence is required to deny your assertion. That “People simply make a decision on all these alternatives” flows logically from the fact they have only one value scale, on which the present value of present goods (consumers goods or available cash) and the present value of future goods (interest) are weighed against each other. To assert the contrary would imply that the potential “reward” for parting with cash doesn’t affect your decision about how much cash you’re going to spend immediately and, as a further consequence, that the opportunity cost, i.e. the value of the next best alternative, isn’t really taken into account in your decision.

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