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Societies for the History of Economics <[log in to unmask]>
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Societies for the History of Economics <[log in to unmask]>
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Am I still jet-lagged - or does this fail to address the question?

Despite the existence of a strong "Rules Party" in the economics profession, we allow banks the discretion to do four things with deposits and government bail-outs:

1. Hoard (over and above required or prudential reserves) = no expenditure
2. Buy second hand bonds = no net expenditure
3. Issue loans (now frequently securitized) = expenditure
4. Issue "performance-based" bonuses = expenditure (some overseas).

In a credit crunch, banks - to protect themselves regardless of the social costs - sever the supply of loans and make fuller use of 1. and 2. (plus, of course, 4.) This is one of the vehicles which Hayek (_Prices and Production_; first edition) encouraged so as to generate "major social instability", "harm" the economy and facilitate labour liquidation: the “only practical maxim of monetary policy to be derived from our considerations is probably the negative one that the simple fact of an increase in production and trade forms no justification for an expansion of credit, and that – save in an acute crisis – bankers need not be afraid to harm production by overcaution even during times of great depression”.  The phrase “even during times of great depression” was deleted in the second 1935 edition (Klausinger 2012, 39, 278).  

For a given stock of second hand bonds, an increase in bank purchases will tend to lower interest rates - which is largely irrelevant when banks use "overcaution" to sever the flow of savings into loans and thus expenditure. (Some investment expenditure goes on during a credit crunch: via the use of retained earning by larger, more established companies). 

Keynes' error was his failure to tackle the engineering problem at source (Leeson 2011). We live in the Keynes-augmented Age of Hayek.  I remain curious about Keynes' "stop in the mind" in this area.   

RL

Klausinger, H. Ed. 2012. Editorial notes.   _Business Cycles Volume VII The Collected Works of F.A. Hayek_. Chicago: University of Chicago Press. 
   
Leeson, R. 2011. The MONIAC updated for the Era of Permanent Financial Crises. Economia Politica 4.4, December: 103-130.  

----- Original Message -----
From: "[log in to unmask]" <[log in to unmask]>
To: [log in to unmask]
Sent: Wednesday, 20 November, 2013 4:12:22 AM
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]" <[log in to unmask]>
> To: [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]>
>> To: [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]>> 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.
>>>       Jordà, Òscar  and Alan M. Taylor, 2013,
>>>       "The Time for Austerity: Estimating the Average Treatment Effect
>>>       of Fiscal Policy"
>>>       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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