Keynes's big mistake- addressing Economists not the general public

       
Keynes addressed his 'General Theory' to his fellow economists while, disarmingly, admitting to having shared the very errors he would now attack.

The matters at issue are of an importance which cannot be exaggerated. But, if my explanations are right, it is my fellow economists, not the general public, whom I must first convince. At this stage of the argument the general public, though welcome at the debate, are only eavesdroppers at an attempt by an economist to bring to an issue the deep divergences of opinion between fellow economists which have for the time being almost destroyed the practical influence of economic theory, and will, until they are resolved, continue to do so. 

It would be quite proper for a Physicist or a Chemist or a Neurosurgeon to politely remind the layman that she has no empirical knowledge of electrons or neurons and isotopes- but Economics is not a Discourse of that type. Its terms are abstractions founded upon familiar activities- consuming, investing, producing, buying and selling- and its applications are wholly idiographic, not nomothetic.

Furthermore, there are more varieties of axiomatic Economic systems than there are Economists and their predictions diverge considerably.

Even the best Economic model- in the sense of the one whose predictions are least wrong- features arbitrary assumptions and fatuous generalizations about social and individual behavior which, in every case, some group of non-economists would be better placed to affirm or deny. Not surprisingly, there is always a non economist whose predictions are better than any contemporary economist- Ricardo, the richest economist ever, first made money and then became an economist. Thus, it is only as a matter of 'comparative advantage', that non-economists pay a little money to the economist for some specific purpose which it would be a waste of their own time to do more quickly and accurately. Thus Jeff Bezos is not an economist, but he employs a lot of nerdy guys with PhDs in Mathematical Economics to sweat the small stuff.

All this was well known in the mid Thirities. Yet, by writing for economists, not laymen, Keynes was choosing the stupidest possible audience. Thus he was bound to write nonsense.

Consider the following-

 A monetary economy, we shall find, is essentially one in which changing views about the future are capable of influencing the quantity of employment and not merely its direction. But our method of analysing the economic behaviour of the present under the influence of changing ideas about the future is one which depends on the interaction of supply and demand, and is in this way linked up with our fundamental theory of value. We are thus led to a more general theory, which includes the classical theory with which we are familiar, as a special case.

If you have a degree in Econ, this seems perfectly sensible. Yet it is nonsense on stilts. Any biological phenomenon features 'changing views of the future' which alter what is done both quantitatively and qualitatively.

Cows grazing in a meadow respond to 'changing views of the future'- e.g. whether it will rain or whether a tiger will attack- and this changes the quantity and direction of employment in the grass eating industry as well as the profession of saying moo.

Keynes, in the introduction to the German edition of his work admits that

 ' the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state'

He does not understand that behavior and expectations must be very different under a totalitarian regime. Hypocrisy is compulsory. Information aggregation is based on lies. Even great famines or crushing military defeats can be both wholly secret while still being common knowledge.

In the introduction to the French edition, referencing 'Say's Law, he writes-

My contention that for the system as a whole the amount of income which is saved, in the sense that it is not spent on current consumption, is and must necessarily be exactly equal to the amount of net new investment has been considered a paradox and has been the occasion of widespread controversy.

This is not a paradox. It is nonsense. Resources may be expended on things- as when one casts one's bread upon the waters- which are neither consumption nor investment but which, proving utile, turn out to be one or the other. The opposite is also true. A White Elephant is neither consumption nor investment though this may not be known when first received.

The explanation of this is undoubtedly to be found in the fact that this relationship of equality between saving and investment, which necessarily holds good for the system as a whole, does not hold good at all for a particular individual.

There is no such equality for either the individual nor the 'system as a whole' because
1) Under uncertainty, regret minimization entails resources being expended on things which, save in some calamitous or ontologically dysphoric scenario, are wholly inutile.
2)  Only the future can reveal if a thing was utile or not fit for purpose.

There is no reason whatever why the new investment for which I am responsible should bear any relation whatever to the amount of my own savings.

Nonsense! Your 'share' of the Investment you initiate equals the value your investors put on your monetary contribution plus 'sweat equity'- i.e. an asset (in this case, the present value of an income stream) which you have 'saved'- i.e. not already committed to some other purpose.

Keynes's next sentence, however, is even more bizarre-

Quite legitimately we regard an individual's income as independent of what he himself consumes and invests.

How is this legitimate? These are dependent variables.

But this, I have to point out, should not have led us to overlook the fact that the demand arising out of the consumption and investment of one individual is the source of the incomes of other individuals, so that incomes in general are not independent, quite the contrary, of the disposition of individuals to spend and invest; and since in turn the readiness of individuals to spend and invest depends on their incomes, a relationship is set up between aggregate savings and aggregate investment which can be very easily shown, beyond any possibility of reasonable dispute, to be one of exact and necessary equality.

This can never be the case if the Future is uncertain.

Rightly regarded this is a banal conclusion.

It is utterly mad!

But it sets in motion a train of thought from which more substantial matters follow. It is shown that, generally speaking, the actual level of output and employment depends, not on the capacity to produce or on the pre-existing level of incomes, but on the current decisions to produce which depend in turn on current decisions to invest and on present expectations of current and prospective consumption.

What cows do at this moment depends on their current expectations. The same is true about people. Why arrive at so banal a conclusion from so utterly crazy a train of thought?

Moreover, as soon as we know the propensity to consume and to save (as I call it), that is to say the result for the community as a whole of the individual psychological inclinations as to how to dispose of given incomes, we can calculate what level of incomes, and therefore what level of output and employment, is in profit-equilibrium with a given level of new investment; out of which develops the doctrine of the Multiplier.

 So, as soon as we know the future, we will be able to calculate propensities which enable us to predict the future coz we already know it.

Or again, it becomes evident that an increased propensity to save will ceteris paribus contract incomes and output; whilst an increased inducement to invest will expand them.

An anticipated fall in income would increase savings. Why speak of 'propensities'?

We are thus able to analyse the factors which determine the income and output of the system as a whole;—we have, in the most exact sense, a theory of employment.

Which cashes out as 'people are employed if it is expected that they can be paid'.

Conclusions emerge from this reasoning which are particularly relevant to the problems of public finance and public policy generally and of the trade cycle. 

Even better conclusions emerge by ignoring economists entirely.

 Another feature, especially characteristic of this book, is the theory of the rate of interest.

Which would soon be shown to be utterly useless because no risk-less asset existed. Countries could be overrun and their bonds could become waste paper.

In recent times it has been held by many economists that the rate of current saving determined the supply of free capital, that the rate of current investment governed the demand for it, and that the rate of interest was, so to speak, the equilibrating price-factor determined by the point of intersection of the supply curve of savings and the demand curve of investment.

This was silly.

But if aggregate saving is necessarily and in all circumstances exactly equal to aggregate investment, it is evident that this explanation collapses.

It collapsed because it was silly not because of some 'necessary equality' which was even sillier.

We have to search elsewhere for the solution. I find it in the idea that it is the function of the rate of interest to preserve equilibrium, not between the demand and the supply of new capital goods, but between the demand and the supply of money, that is to say between the demand for liquidity and the means of satisfying this demand.

Money, or Credit, comes in a lot of different forms and has a lot of different prices. We can always find some way of defining demand and supply so that they are brought into equality by a price movement. But, this is merely a manner of speaking.

The Classical theory of Employment
Keynes summarizes it (on the basis of Pigou's work) as follows

 there are only four possible means of increasing employment: 

(a) An improvement in organisation or in foresight which diminishes 'frictional' unemployment;

Foresight, or its lack, is all that matters. Organization itself depends on predictability. 

(b) a decrease in the marginal disutility of labour, as expressed by the real wage for which additional labour is available, so as to diminish 'voluntary' unemployment;

Keynes means a decrease, at the margin, in the opportunity cost or transfer earnings of Labor. Thus the real wage can remain constant but Unemployment still falls if Unemployment Benefit is taken away.

(c) an increase in the marginal physical productivity of labour in the wage-goods industries (to use Professor Pigou's convenient term for goods upon the price of which the utility of the money-wage depends);

Productivity affects real per unit labor cost. It does not matter in which industry it occurs. Higher productivity, ceteris paribus, means lower unemployment.

(d) an increase in the price of non-wage-goods compared with the price of wage-goods, associated with a shift in the expenditure of non-wage-earners from wage-goods to non wage-goods. 

This is a meaningless distinction which arises out of old fashioned notions about vanity and luxury goods and how the rich are a different species than the rest of us.

This whole classical theory, like the Keynesian theory, is junk. Expectations and Uncertainty matter but this is as true of cows as human beings.

Cows will devote less time to eating grass and more to saying moo and moving away if they have adverse expectations or face greater uncertainty. The same is true of how we employ ourselves or others or are ourselves employed.

Involuntary unemployment

The demand for most types of labor is derived from the stuff labor helps produce. If 'Aggregate Demand' in the Economy is weak because the future now appears more uncertain, then the demand for Labor falls. At the existing wage rate, some people who want to work can't find employers willing to take them on.

Keynes gives his definition-
Men are involuntarily unemployed- If, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment

This is nonsense. If supply and demand increase at the current money wage, then employment will increase. A small change in the cost of living does not matter.

It is a shock to realize that Keynes wasn't just not a Keynesian, he was also a fucking cretin.

Why was this not apparent at the time? The answer is Keynes pretended to be smart. He references Einstein's theory of Relativity like he actually understood it.

The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight—as the only remedy for the unfortunate collisions which are occurring.

Where did Keynes meet these 'geometers' who experienced gravitational effects strong enough to cause parallel lines to meet in their locality? The stupid economists reading this shite probably thought Keynes met them at High Table or in a Gents toilet. They got a frisson from reading about the Social Life of this oh-so-superior Old Etonian and Cambridge Apostle.

Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.

Fair point. Economics is a shite discipline. Tell it go fuck itself by all means.

We need to throw over the second postulate of the classical doctrine and to work out the behavior of a system in which involuntary unemployment in the strict sense is possible. 

This is easily done. Just introduce Expectations. If people expect a Recession, the Derived Demand for all factors of production will fall and they will all suffer 'involuntary' unemployment.

There is no need to write nonsense like-

with a given organisation, equipment and technique, real wages and the volume of output (and hence of employment) are uniquely correlated, so that, in general, an increase in employment can only occur to the accompaniment of a decline in the rate of real wages.

Sez you. A good harvest or oil strike could increase real wages without increasing employment. Indeed, for a large enough 'Income effect', it may reduce it.

Thus I am not disputing this vital fact which the classical economists have (rightly) asserted as indefeasible.

Because you are a cretin.

In a given state of organisation, equipment and technique, the real wage earned by a unit of labour has a unique (inverse) correlation with the volume of employment.

Fuck off. Nobody knows the real wage. We estimate it after the fact and get different results coz of Laspeyres bias or Paasche bias or whatever. If Keynes had not decided to address Economists- i.e. cretins- he would not have written anything so cretinous.

Economics is a type of pedagogy- like 'Creative Writing' or 'Literary Theory'- it is not a Science- like Physics- or even an Art- like producing Literature. It is true that some second rate people may be able to pass themselves off as 'Economists' thanks to this pedagogy just as there are some cretins who can pass themselves off as cultured people on the basis of theoretic jargon. However, no body needs to study this shite subject in order to excel in actually economizing on the use of resources or propelling Society to a more stable and prosperous configuration.