Thoughts on economics and liberty

The topsy-turvy logic of the Keynesians – exposed by Lynne Kiesling

I've commented extensively in the past re: the dangerous ideology of socialism, including Fabian socialism.

Keynes was a Fabian socialist. I've explored his SERIOUSLY INCOMPETENT (but highly influential) ideas earlier in the following posts:

Today, courtesy Peter Boettke on Facebook, I came across an excellent blog post by Lynne Kiesling and sought her permission to reproduce it here, for dissemination to my audience. Lynne, an economics academic in the USA, has graciously granted permission. So here goes.

This is a very clear and persuasive post. I thoroughly commend it to you:

Stimulus failure: A costly lesson on Keynes and Say’s Law?

September 12, 2011

Lynne Kiesling
Macroeconomics and I have never gotten along, and for years I couldn’t figure out why — I’ve just never understood much of the underlying logic, why the analyses start where they do and make the assumptions they do (the only exception to this is my undergrad class with William Hart at Miami when we worked through Malinvaud’s Theory of Unemployment Reconsidered). By nothing more than tenacity and stubbornness I managed to pass enough macro to be accepted into the economics guild.
This recession and the policy debates in it are clarifying some ideas that resolve my cognitive dissonance, the largest of which is the central role of consumption in Keynesian economics. This focus on consumption as the first step in the causal link that leads to underemployment in equilibrium seems to invert the causality of value creation embedded in all other economic models, which start with the production of compelling value propositions that attract customers. This shift in focus to consumption pivots on how Keynes’s model, and Keynesian models, treat Say’s Law. The Keynesian interpretation of, and rejection of, Say’s Law provides the justification for focusing on aggregate demand in general, and consumption in particular, as policy levers during business cycles.
In August Steve Horwitz wrote a clear analysis of the interpretations of Say’s Law, and it’s a good place to start. After quoting Say’s Treatise on Political Economy, he notes that:
… Say was making the claim that production is the source of demand. One’s ability to demand goods and services from others derives from the income produced by one’s own acts of production. Wealth is created by production not by consumption. My ability to demand food, clothing, and shelter derives from the productivity of my labor or my nonlabor assets. The higher (lower) that productivity, the higher (lower) is my power to demand.
This is different from, and more nuanced than, the terse “supply creates its own demand” interpretation that Keynes placed on Say. It’s also not very different from Smith, Ricardo, or Mill in their articulations of the central role of productive activity in creating value, and hence economic growth. Steve goes on to discuss how Say’s Law and its operation in real economies also depends on money markets and how the banking system operates, and how Say’s Law does still admit the possibility of underemployment in equilibrium; my summary here does not do Steve’s argument justice, so I encourage you to read it yourself.
This prelude sets up a blog post from Robert Higgs on Friday that lit a light bulb of comprehension for me with respect to the current policy proposals to “create jobs” to increase consumption to increase aggregate demand to end the recession. Bob points out that if you take the domestic national income accounting relationship (Y=C+I+G), and if you look at data on consumption and government spending, they are both above pre-recession levels. Consumption as the laggard in aggregate demand is not driving the recession. Nor is government spending, which is clearly high.
The economy remains moribund not because consumption spending has failed to recover and not because government spending has failed to increase, but because the true driver of economic growth—private investment—remains deeply depressed. Gross private domestic fixed investment fell steeply after the second quarter of 2007, and in the second quarter of 2011 it remained 19 percent below its pre-recession peak.
After going into some important detail on private domestic investment, Bob returns to the theme that has animated all of his work (if you haven’t read Crisis and Leviathan, you should!), a theme that I think has a lot of explanatory power in this recession:
Private investors, despite the full recovery of real consumer spending and the increase of real government spending for final goods and services, remain apprehensive about the future of new investments, especially new long-term investments. I have argued repeatedly during the past three years that an important reason for this apprehension and the consequent reluctance to make new capital commitments is regime uncertainty—in this case, a widespread, serious fear that the government’s major policies in areas such as taxation, Obamacare, financial reform, environmental regulation, and other areas will have the effect of depriving investors of control over their capital or diminishing their ability to appropriate the income that the capital generates.
Note also that Greg Mankiw made a similar argument on Sunday in his New York Time column. Policies that focus on increasing jobs to increase consumption get the causality the wrong way around. And, as Steve Horwitz said in the post that got me thinking about this over the weekend,
You want recovery?  Forget consumption.  Ask yourself what sorts of policy changes would make entrepreneurs and investors feel like they know what to expect over the medium and long run and convince them that they will be able to keep the fruits of their labor and investments.  Hint:  the president’s jobs plan ain’t it.
Frankly, I think the important factor for long-run growth is innovation and technological change rather than investment in existing factors of production to produce existing value propositions … but the policies that facilitate innovation are correlated with policies that facilitate investment, so I’ll leave their arguments as they stand.
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