"Lenders don't generate their sources of funds from thin air."
Are you arguing that every dollar lent has to be deposited first by a saver, i.e. withdrawn from consumption? As writers on finance have known for a very long time, it is almost the opposite: a substantial proportion of bank deposits are created by loans credited to borrowers.
Avner Offer
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From Avner Offer, Chichele Professor Emeritus of Economic History, University of Oxford
All Souls College, High St., Oxford OX1 4AL, tel. 44 1865 281404
email: [log in to unmask]
personal website:
http://sites.google.com/site/avoffer/avneroffer
________________________________________
From: Societies for the History of Economics [[log in to unmask]] on behalf of [log in to unmask] [[log in to unmask]]
Sent: 19 November 2013 20:12
To: [log in to unmask]
Subject: Re: [SHOE] The Keynesian multiplier
On 11/19/2013 1:28 AM, Robert Leeson wrote:
As I made clear in November 2011, it is evidence that the assumption has been falsified that James is requested to provide.
RL
Sorry I did not answer Rob's the question as he intended. I thought the fact that savings are spent by borrowers was much too obvious for him to have been asking for such proof or "evidence". So here is the proof of Keynes's error. Any time anyone takes a loan -- car loan, home mortgage, consumer loan, or uses a credit card to make a purchase -- they prove Keynes's understanding of saving to be wrong. Such proof is going on everyday, except that the unrepentant Keynesians don't recognize it.
Lenders don't generate their sources of funds from thin air. They issue IOUs that are "purchased" by savers, except central banks that create credit out of nothing. That is why one reads from Adam Smith that saving is the acquisition of interest- or dividend-earning assets. Alfred Marshall, who tried unsuccessfully to teach economics to Keynes, also makes the point when he explains that "in 'western' countries even peasants, if well to do, incline to invest the greater part of their savings in Government, or other familiar stock exchange securities, or to commit them to the charge of a bank" (1923, 46; my emphasis); cited on page 15 of the 1998 volume to which Rob Leeson contributed a chapter. Marshall is here elaborating J.S. Mill's (Works, 2: 70) explanation of the meaning of saving, partly cited on page 14 of the same 1998 volume.
We (at least, I do) explain this principle when teaching the bank deposit multiplier process: someone takes their savings (in cash) to deposit in a bank and the bank lends a fraction of that, BC = (1 - r)D, and so on. (Even when one deposits a check, the check is an order to pay money (cash), ultimately.) Texts in money and banking provide country-wide data on banks' sources of funds (savings) and uses of funds (loans and investments). Rob can look up the data from any good money and banking text; I use these days R.Glenn Hubbard and Anthony O'Brien's, Money, Banking, and the Financial System. Otherwise, Rob can go to his bank's manager. In humility, he should ask the manager from where the bank gets its funds to lend. If, instead, he takes Keynes's (1930, 25) arrogant position that explanations of "Practical bankers, like Dr. Walter Leaf" that banks depend upon their depositors' savings to lend to be not "the commonsense which it pretends to be," he would come away without learning anything.
Clearly, the inclusion of cash hoarding in the definition of saving is the "trap door" for Keynes and Keynesians in their understanding of the classical explanation that savings are spent by borrowers. The demand for money (cash) is for an asset to hold, but the demand for credit (loan) is for a facility to spend without using one's income. Loans are funded by savings. What's so hard to understand about that? BTW, I meant to cite Joan Robinsion (1960, 27) yesterday: "If private saving is going on, there is a leakage of notes [cash] out of circulation into hoards." And this is the foundation for the mythology of Keynes's "paradox of thrift"!
James Ahiakpor
----- Original Message -----
From: "[log in to unmask]"<mailto:[log in to unmask]> <[log in to unmask]><mailto:[log in to unmask]>
To: [log in to unmask]<mailto:[log in to unmask]>
Sent: Tuesday, 19 November, 2013 5:47:10 AM
Subject: Re: [SHOE] Where are the ex-Austrians?
On 11/18/2013 1:27 AM, Robert Leeson wrote:
"Keynes's multiplier argument is founded upon three fundamental assumptions that turn out to be false: (1) that savings are not spent but are a withdrawal from the expenditure stream ..."
Since James also made this assertion in November 2011, perhaps he can now provide some evidence to support it.
RL
It's incredible to me that someone writing on the History of Economic
Thought list wants "evidence" that Keynes considered saving not to be
spending by income earners but a withdrawal from the expenditure
stream! Incredible also because every introductory macroeconomics
students learns that meaning of saving. Anyhow, Robert can look up
Keynes's meaning of saving in the _Treatise_ (1930), volume 1, p. 172,
the _General Theory_ (1936), pp. 74 and 210; Keynes's _Economic Journal_
articles (December 1937) and (June 1938). (Joan Robinson, _EJ_, 1938
repeats Keynes's definition of saving to mean a withdrawal from the
expenditure stream.) Robert can also check these pieces of evidence, in
contrast with the classical explanation that savings are spent by
borrowers, that is, saving is not cash hoarding (Smith, Ricardo, and
J.S. Mill) in chapter 2 of _Keynes and the Classics Reconsidered_
(Kluwer, 1998), a volume to which he contributed a chapter (7).
James Ahiakpor
----- Original Message -----
From: "James C.W. Ahiakpor" <[log in to unmask]><mailto:[log in to unmask]>
To: [log in to unmask]<mailto:[log in to unmask]>
Sent: Monday, 18 November, 2013 5:27:45 AM
Subject: Re: [SHOE] Where are the ex-Austrians?
Steve Kates wrote:
I think there should be a Godwin's Law for Economics. Whoever brings
empirical results into a theoretical discussion automatically loses.
It should not be thought that I stepped back very far when I agreed
that the failure of the stimulus is not obvious. It's obvious that
it's not obvious, since this will remain an open and never ending
debate for as long as economists exist.
But so far as the economic policy side is concerned, there is no
waiting around for academic economists to decide which way is up. With
the sequestration in the US and other similar actions across the world
by those who are trying to manage their economies, this is a debate,
that for the time being anyway, is resolved. No country in the world,
with the possible exception of the US, would try to stimulate their
economies through additional levels of public spending. The recessions
are not over. Economic conditions are worse than in 2008. But
increases in public spending are off the table everywhere. If we can't
even agree on that, then what can anyone ever say that can be a
foundation for further discussion.
I think for any law to be useful, there has to be a mechanism for its
enforcement. That is why I despair at Steve's suggestion. Who will
enforce Godwin's Law for Economics? I also think data or empirical
results can be useful in a "theoretical" discussion. After all, aren't
theories supposed to be evaluated with evidence to ascertain their
reliability? I believe a more useful approach to dealing with
"empirical results" used to affirm a certain belief system is rather to
examine the nature of the data used to estimate the results as well as
the methodology employed in constructing the functional form or
estimating equation. On that basis, it is easy (for me, at least) to
dismiss the meaningfulness of estimated government expenditure
multipliers as a basis for belief in Keynesianism, particularly fiscal
stimulus.
Keynes's multiplier argument is founded upon three fundamental
assumptions that turn out to be false: (1) that savings are not spent
but are a withdrawal from the expenditure stream, (2) that government
(and business) expenditures don't depend upon income or savings (even
for a closed economy), and (3) that consumption spending takes a
unidirectional form, like running a relay race -- A's consumption
becomes B's income, then B's consumption becomes C's income, and so on.
Now if one corrects assumption (1) to realize that savings fund business
investments as well as government budget deficits, and (2) that
government spending has to be financed by taxes (paid out of income) and
there cannot be any measured consumption expenditures without any
current production and sales--so-called "autonomous consumption" for the
economy as a whole, then the expenditure multiplier has to be equal to
infinity. But there is also nothing left to multiplier it by. That's
why the government expenditure multiplier EFFECT is zero.
No amount of fooling around with functional forms negates the above
conclusion. There is thus no point, as far as I'm concerned, arguing
with someone who insists on basing their belief in Keynesianism on
estimated multipliers. I published the "mythology of the Keynesian
multiplier" in the _American Journal of Economics and Sociology_ in 2001
and I repeat the point in footnote 20, p. 87, of my modern Ricardian
equivalence article in the _Journal of the History of Economic Thought_
(March 2013). How else can I hope to persuade a non-repentant Keynesian
(who also claims to be a historian of economic thought) of the folly of
such belief? If one introduces central bank new money creation into the
argument, then we would have an explosive multiplier effect on real
income (output and employment) nowhere observed on earth! As Murray
Rothbard once observed, regarding the silliness of the Keynesian
multiplier argument, all government needs to do to create prosperity for
ever is just to find just 1 dollar to spend.
Indeed, I think such "studies" as publicized by Alesina without getting
to the heart of the Keynesian mythology don't serve a very useful
purpose. They are rather a distraction. Aggregate data are generated
by a multitude of factors (or impulses, the favorite language of the
econometric estimators). Without carefully identifying them and
isolating their respective impacts on observed data, no estimation tells
a useful story about the economy. This is what we learn from
econometrics. And this is also why someone once wrote about the two
things he wouldn't like to see in their preparation: sausages and
econometric estimation, the latter because many unsavory things can be
done to generate the end result!
James Ahiakpor
On 17 November 2013 00:53, Alan G Isaac <[log in to unmask]<mailto:[log in to unmask]>
<mailto:[log in to unmask]><mailto:[log in to unmask]>> wrote:
On 11/16/2013 8:36 AM, Alan G Isaac quoted:
"The range of the spending multiplier estimated using
these various approaches is from .4 to 1.5, with some
estimates even lower than .4 and some estimates larger
than 1.5. However, most fall in the .4 to 1.5 range."
If I may offer just one more quote from some people who care about
the evidence.
Jordą, Ņscar and Alan M. Taylor, 2013,
"The Time for Austerity: Estimating the Average Treatment Effect
of Fiscal Policy"
http://www.nber.org/papers/w19414
"<http://www.nber.org/papers/w19414>[W]e have a measure of the multiplier that
explicitly accounts for failures of identification
due to observable controls. Our estimates ...
suggest even larger impacts than the IMF study when
the state of the economy worsens. ... It appears
that Keynes was right after all."
As Steve now allows, it is *not* obvious that the fiscal responses
to the Great Recession invalidate Keynesian claims about the
role of aggregate demand. Not in the least.
Cheers,
Alan Isaac
--
James C.W. Ahiakpor, Ph.D.
Professor
California State University, East Bay
Hayward, CA 94542
(510) 885-3137
(510) 885-7175 (Fax: Not Private)
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