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From:
"Rosser, John Barkley - rosserjb" <[log in to unmask]>
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Societies for the History of Economics <[log in to unmask]>
Date:
Tue, 26 Nov 2013 17:48:13 +0000
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Regarding gold as money, this is a comment on economic history rather than history of economic thought (sorry), but I believe it is accurate to say that gold has never fully served as money in all of the three traditional functions of money.  Certainly it has been a unit of account during periods of gold standards, and it has also during long periods of time including not official gold standards served as a store of value or wealth, popular for this given its inertness and rarity, although it has not always "maintained its value" as we have seen in such periods as the years following 1982 and the last two years.

The problem is that it has never ever served as a general medium of exchange.  Sure, there have been gold coins minted at various times in history that have also circulated.  But, because of its rarity these coins have always been of high value in whatever economy they were issued and so have only been used for occasional high value transactions.  Nobody has ever used gold coins on a regular basis to buy their weekly groceries, unless they were very wealthy and feeding a very large household, presumably including servants or slaves.  Indeed, gold's role has always highlighted the fundamental conflict that monetary policymakers face: to expand the money supply to stimulate economic activity or to restrain the money supply to prevent inflation.  Gold has generally maintained its value and relying on it has generally restrained inflation, but its rarity and occasional periods of shortage during gold standard periods have also been associated with periods of low growth or depression and deflation.  It is usually a good store of value and unit of account, but a lousy general medium of exchange.

Barkley Rosser
PS:  Happy Thanksgiving to all who celebrate it, and also Happy Hanukkah to all who celebrate it, this year being the first time in a long time (and the last for another long time) when the beginning of Hanukkah coincides with Thanksgiving.

-----Original Message-----
From: Societies for the History of Economics [mailto:[log in to unmask]] On Behalf Of Bylund, Per L.
Sent: Monday, November 25, 2013 1:30 PM
To: [log in to unmask]
Subject: Re: [SHOE] The money multiplier

I'm not sure what this comment is for. Nobody has proposed gold as money.

What I am saying is simply this: If we are discussing economic theory, then it is inexcusable to rely on such extensively specific assumptions (fiat paper currency, government money monopoly, fractional reserve banking sanctioned by a central bank, etc.) without reflecting on what they mean, or what their implications for the economy are. I think the reason people in this discussion are talking past each other is that these assumptions remain unaddressed. The same is true regarding my questions, except for the statement that (paraphrasing) "the view of money doesn't matter". What I intended to show with the gold coin example was that it DOES matter. 

Stating that gold coin money is problematic because government cannot tamper with its supply "when needed" fails to address the issue that I have been trying to bring to our attention. I would even go so far as to say that, in a roundabout way, it stresses the problem (not a solution). So far, the discussion has consisted primarily of assertions and loose references to "empirical data" - but we cannot interpret empirical data without theory. 

I've requested that those making these claims state the assumptions on which they depend, and I have made suggestions of necessary assumptions (stated again above). Surely a scholar cannot hesitate to disclose what assumptions are necessary for his/her arguments in a theoretical discussion. 


PLB

_____________________
Per L. Bylund, Ph.D.
Baylor University
 
[log in to unmask]
(573) 268-3235

-----Original Message-----
From: Societies for the History of Economics [mailto:[log in to unmask]] On Behalf Of Avner Offer
Sent: Monday, November 25, 2013 8:16 AM
To: [log in to unmask]
Subject: Re: [SHOE] The money multiplier

The trouble with gold is that there isn't enough of it. So in a growing economy, we would have permanent deflation with all its pathologies. 

Avner

======================================================
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 Bylund, Per L. [[log in to unmask]]
Sent: 25 November 2013 13:14
To: [log in to unmask]
Subject: Re: [SHOE] The money multiplier

I think this is at the core of the present discussion. But I think it is rather outrageously blinded by the present state of finance regulation and a one-eyed focus on empirical data at the expense of theory. All of that which is said is true only if we first assume a fractional reserve scam with a central bank's blessing. This is applied theory on the specific policy climate of today, including its fiat paper currency and political money monopoly, but is in no sense universal. As I noted in a previous message, this "theory" necessitates a certain (and quite idiosyncratic) view of what money is. And, as I asked in a the same message (if I recall correctly), the theory fails completely if the word "money" (which for whatever reason no one here seems interested in defining) is replaced with e.g. "gold coins." It is hardly the case that

Banks do compete for deposits, but not in order to "lend" them: rather, their purpose is to acquire gold coins, on the basis of which they may create new gold coins.


PLB

_____________________
Per L. Bylund, Ph.D.
Baylor University
[log in to unmask]<mailto:[log in to unmask]>
(573) 268-3235

From: Societies for the History of Economics [mailto:[log in to unmask]] On Behalf Of Lilia Costabile
Sent: Saturday, November 23, 2013 12:17 PM
To: [log in to unmask]
Subject: Re: [SHOE] The money multiplier

I agree with professor Offer.
When a bank creates a loan (which is an asset for the bank), it also creates a liability in the form of a deposit.

A deposit is a liability of the bank towards its customer (*): the bank cannot lend its liabilities. Also, the bank cannot lend savings, because the savings accounts kept with a bank represent the banks' liabilities to the savers.
The bank, by creating a loan, creates new money (some call it deposit-money); it does not lend already existing money. On this point, may also add the MacMillan Report to the reading list?

Banks do compete for deposits, but not in order to "lend" them: rather, their purpose is to acquire cash, on the basis of which they may create new deposits.

The banking system as a whole can create money up to the limit given by the value of the money multiplier, for a given monetary base. The size of the multiplier is determined by the reserve requirements set by the Central Bank (plus voluntary reserves) and the public's preferred cash-to-deposits ratio.

It is physiological that the banks taken together never hold enough cash to convert all the existing deposits into cash, otherwise there would be no money-multiplier at all (money supply=monetary base!).
If the public's cash-to-deposit ratio suddenly jumps up, so that they want to redeem all their deposits into cash, the banks will be insolvent, and either the Central Bank will come in as the lender of last resort, or there will be a crisis.

Lilia Costabile

 (*) because the bank assumes an obligation to exchange the deposit-money into cash at any time.



Il giorno Nov 23, 2013, alle ore 3:28 PM, Avner Offer <[log in to unmask]<mailto:[log in to unmask]>> ha scritto:


James Ahiakpor writes:

'it is impossible for banks' assets to exceed their deposit liabilities'

But that is no obstacle to the creation of new money. Every time a bank creates an asset (a loan), it also creates a liability in the form of a deposit. The desposit is created by the loan, not by savers. The risk for the bank is not being able to meet its liabilities, whicih is a matter of liquidity. It is not constrained necessarily by the existence or scale of external deposits.

Avner Offer

======================================================
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]<mailto:[log in to unmask]>
personal website:
http://sites.google.com/site/avoffer/avneroffer
________________________________________
From: Societies for the History of Economics [[log in to unmask]<mailto:[log in to unmask]>] on behalf of [log in to unmask]<mailto:[log in to unmask]> [[log in to unmask]<mailto:[log in to unmask]>]
Sent: 23 November 2013 01:25
To: [log in to unmask]<mailto:[log in to unmask]>
Subject: Re: [SHOE] The Keynesian multiplier

On 11/22/2013 3:02 AM, Lilia Costabile wrote:

It is interesting: professor Ahiakpor takes us back to Cannan's notion of "cloakroom banks", whereby banks are mere intermediaries between depositors and borrowers. New lending originates in a reduction in depositors' preferred cash-to-deposit ratio.
But what if:
(i) given the public's preferred cash-to-deposits ratio, the foreign reserves of the central bank rise as a consequence of an external surplus? Or if the central bank reduces the reserve requirement ratio?

My delight to respond to Lilia Costabile's questions.  If the central bank chooses merely to hoard the increased reserves, nothing else happens.  Only when the central bank purchases some (financial) assets in the domestic economy does base money increase, leading to an increase in the rate of credit creation by banks (or other financial institutions.  However, a central bank need not even wait to acquire any external funds in order to cause an increase in the flow of credit in the economy (short run).  It simply may print the money and purchase securities or lower its lending rate to attract more borrowing from banks.  That's why earlier I explained that only a central bank may create credit (loans) from thin air.

If the central bank reduces the required reserve ratio, it merely permits banks to hold a lesser amount of the public's deposits and thereby lend more than previously (assuming no change in banks' own economic or excess reserve ratio).


(ii) if all banks move "forward in step"? if a single commercial bank initiates the expansion of credit it may "run out" of cash. But if the whole banking system does so "in step", every loan is by definition a new deposit. Loans create deposits, not the other way around. The only limit to the expansion of loans, in an open economy,  is the foreign reserves of the Central Bank.

This is incorrect.  It doesn't matter if all banks want to move "forward in step."   Think about it this way.  Several banks, without any cash deposits with them grant $1,000 loans to their customers.  The typical bank balance sheet will have zero Reserves of cash and a claim (bank loan) of $1,000 under the assets column of the banks' T-Account.  The bank also will have $1,000 in the Liabilities column of the T-Account.  Now the loan was incurred to purchase something: credit is a facility to make a purchase without income, as I explained earlier.  So the borrower writes a check -- an order to pay $1,000 -- in payment to someone else in the economy.  Let that person present the check for payment of cash.  There is no way any of these lenders would be able to meet their liabilities; their Reserves have zero cash with which to redeem the claim.

If Lilia had followed my demonstration of the deposit expansion process (carefully), she wouldn't still be in this state of believing that banks can create credit out of thin air, following J.M. Keynes (1930).  I'm glad she's made a reference to Edwin Cannan.  I think Cannan understood the process better than Keynes  because Cannan studied Adam Smith, having edited the Wealth of Nations.  Smith's chapter on "Money" discusses banking firms and the process of their savings intermdediation before the chapter on "Of Stock Lent at Interest."  In between those chapters, Smith also discusses "capital" -- funds deriving from savings -- the concept with which Keynes had perhaps his most difficulty in understanding the classical theory of interest.  The concept of "capital" also was a problem for  J.A. Schumpeter.  In fact, Schumpeter declared that we should abolish use of that concept since it was rather confusing to him: "What a mass of confused, futile, and downright silly controversies it could have saved us, if economists had had the sense to stick to those monetary and accounting meanings of the term instead of trying to 'deepen' them!" (1954: 323).   F.A. Hayek (1941: 9) also says the same thing about "capital:, "The  ... ambiguity of the term capital has been the source of unending  confusion and the suggestion has often been made that the term should be banned entirely from scientific usage."

Thus, Schumpeter, who praised Keynes's money supply and demand theory of interest over the classical "capital" supply and demand theory is not a reliable source to clarify the process of banks' financial intermediatioin as Avner Offer earlier suggested.  Even Irving Fisher got side-tracked over the classical theory of interest, suggesting that "The student should ... try to forget all former notions concerning the so-called supply and demand of capital as the cause of interest" (1930, 32)!  He thought the Austrian time-preference theory was more meaningful.



Because this discussion has relevant macroeconomic implications, it may be useful to concentrate not just on the microeconomics of one single bank considered as an individual firm, but on the banking system as a whole.

One sometimes gets the macro wrong when not paying careful attention to the micro aspect of issues.  The simple fact is that one cannot supply or sell (on the spot market) that which has not been created or is not in existence.  Can't grant a loan on non-existent savings.  The "laws of physics" deny that possibility!



By the way, as to the "writers on finance" referred to by Professor Offer, we may add Knut Wicksell and  Dennis Robertson.

I am aware of Robertson's (1957) puzzling treatment of banks as financial intermediaries.  I write elsewhere (Classical Macroeconomics, p. 53) that "Robertson's description of banks as intermediaries between savers and borrowers (investors) [on pages 41-42] does not appear to be consistent.  He frequently treats banks as institutions capable of extending credit (loans) without relying on the deposits of savers, just Wicksell (1898), Fisher (1912), Pigou (1927, 123-4), and Keynes (1930, 1: 25-30)."  But unless banks draw from their own"capital" -- owners' contributions to fund the enterprise -- it is impossible for banks' assets to exceed their deposit liabilities.  I appreciate Patrick Spread's contribution to clarify the point, addressing Avner Offer's insistence to the contrary.




Regards

Lilia Costabile



James Ahiakpor






Il giorno Nov 21, 2013, alle ore 10:43 PM, James C.W. Ahiakpor <[log in to unmask]<mailto:[log in to unmask]>><mailto:[log in to unmask]> ha scritto:



Unfortunately, the idea that banks lend more than each depositor's savings with them appears well entrenched in some people's minds.  They are convinced of that by the formula describing the total of deposits in a banking system, D = dDo, where d = 1/(cu + rd + re), the deposit multiplier,  Do is the initial cash deposit that starts a deposit expansion process, and D is the sum total of deposits.  The problem is that not sufficient care is taken by some writers to clarify the process.  A good reference to the process's clarity is Adam Smith's (_Wealth of Nations_) chapter, "Of Stock Lent at Interest."  There Smith explains that in the process of lending, "money is, as it were, but the deed of assignment, which conveys from one hand to another those capitals [savings] which the owners do not care to employ themselves.  Those capitals may be greater in almost any proportion, than the amount of the money [cash] which serves as the instrument of their convey!
ance; th
e same pieces of money successively serving for many different loans, as well as for many different purchases" (Chicago: 1976, 374).  In the modern deposit creation formula, Do is the equivalent of Smith's money that carries the first saver's deposit to the bank.

Indeed, if any bank could lend more than deposited with it, it could just as well create deposits out of thin air and never bother about deposits.  The fact of the matter is that banks always lend a fraction of their deposits, albeit a substantial fraction.  That is indicated in the formula, BCo = (1 - rd)(1 - re)Do, where BCo is bank credit, rd = required reserve to deposit ratio, and re = bank's economic or excess reserve to deposit ratio, and Do = the initial deposit (cash) that starts the process.  When the first loan (BCo) created on the basis of Do comes back as a new deposit (savings), it will be D1 = (1 - cu)BCo = (1 - cu)(1 - rd)(1 - re)Do, where cu = the income recipient's currency to deposit ratio or currency drain.  Thus, the next loan created will be a smaller magnitude than the first, being BC1 = (1 - rd)(1 - re)D1, and so on.

The suggestion of 100 per cent reserve to deposit ratio by the likes of Irving Fisher, Henry Simon, and Milton Friedman was motivated by the concern that banks always have cash reserves to pay each depositor's claims.  (Murray Rothbard's endorsement of that policy stems from his belief that fractional-reserve banking constitutes a fraud on the part of banks.)  It was not made with the understanding that banks lend more than each depositor's savings.  That would be erroneous.  In a fractional reserve system, which also means that banks lend less than 100 per cent of each depositor's savings, banks never can meet all of their liabilities when depositors demand redemption in cash at the same time.  Indeed, some textbooks teach the deposit expansion process without paying careful attention to the fact that it is the subsequent savings of those who earn incomes from loan expenditures that make new loans possible.  The careful authors don't do that.  I make sure, when I teach the !
deposit
expansion process, that my students understand this.

James Ahiakpor

Avner Offer wrote:


Dear James,

Your write in exasperation 'What am I supposed to do with [it]?' , as if you possess revealed truth. Your exasperation suggests that economics textbooks du jour are holy writ, and assumes that you read them correctly (see Alan Isaac's response).
Putting Keynes to one side, if economists and bankers had a correct understanding of money and banking, we would not have had such a financial crisis.

For the many historical 'writers in finance' I allude to see i.a. Schumpeter, History of Economic Analysis (1954), IV.8.7, pp. 1111-1116 ('Bank Credit and the 'Creation' of Deposits'). Among such notable writers were also Irving Fisher, Henry Simons and Milton Friedman, all of whom proposed at one time or another a 100% reserve system of banking, to prevent bankers from creating 'checkbook money'. (Hixson, A Matter of Interest, 247-248).

The argument is not that all loans are made out of thin air, but that some fraction of them are, constrained by the risk that bankers feel able to take. They lend bank-made-money, take collateral, and earn interest. Ultimately, banks need to be able to satisfy liabilities in legal tender.

The bank does lend out its deposits and gets a mark-up. The risk is that all depositors will ask for their money at once. But they don't. So the bank lends more than it has on deposit, some of it comes back as new deposits, it lends a little more than that and so on. How much new money to create is a matter of discretion, constrained (micro) by the quality of the borrower and (macro) by economic performance overall.

Banks need the cushion of deposits to create new money, hence deposit and loan rates move together. There are (and have been) various classes of deposits that pay no interest, or indeed incur a charge.

Commercial banks need to borrow from other banks when demands for payment (e.g. that check from the car dealer) come in and they have no legal tender to pay it with, or not enough to take on more risk. Likewise with borrowing from the central bank. In the extreme case, caused by a run on the bank, they pay more interest to the central bank because other banks won't lend to them. In fact commercial banks have learned by now that they won't even have to pay that penalty.

It isn't any institution that can create a loan out of nothing, only institutions licensed to do so. That's one reason why bankers are rich, and why (when improperly regulated), banks come to grief.

'His bank manager' - what a quaint notion. In this town there are no longer local 'bank managers' with discretion over lending. Nor is it clear that traditional small-town bank managers fully understood that they were creating new money when they lent. Economists seem to have trouble with this idea as well.

Your final paragraph is technically correct, but the scope for hoarding (of banknotes or precious metal) is quite limited.

Avner Offer


======================================================
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]<mailto:[log in to unmask]><mailto:[log in to unmask]>
personal website:
http://sites.google.com/site/avoffer/avneroffer
________________________________________
From: Societies for the History of Economics [[log in to unmask]<mailto:[log in to unmask]><mailto:[log in to unmask]>] on behalf of [log in to unmask]<mailto:[log in to unmask]><mailto:[log in to unmask]> [[log in to unmask]<mailto:[log in to unmask]><mailto:[log in to unmask]>]
Sent: 20 November 2013 23:31
To: [log in to unmask]<mailto:[log in to unmask]><mailto:[log in to unmask]>
Subject: Re: [SHOE] The Keynesian multiplier

On 11/19/2013 1:09 PM, Avner Offer wrote:


"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

======================================================

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]<mailto:[log in to unmask]><mailto:[log in to unmask]>
 personal website:
 http://sites.google.com/site/avoffer/avneroffer


Avner Offer is here repeating Keynes's (1930) fallacious claim that I noted earlier.  What am I supposed to do with?  I also don't know who these "writers on finance" are who would claim that "a substantial portion of bank deposits are created by loans credited to borrowers."
Now  if a bank credits a borrower's account with, say, $10,000 and the borrower writes a check for $10,000 to pay for a car.  The car seller deposits the check in the company's bank account and the bank sends the check for collection to the originator (bank) of the loan.  If the originator of the loan didn't have $10,000 to meet the claim, what happens to that bank?

Perhaps, Avner is not very familiar with money and banking or the process of financial intermediation; a good introductory macroeconomics text teaches the principle, too.  To help Avner think clearly about the necessity of banks having deposits (savings) prior to lending, s/he should answer the questions: If banks can create credit without prior savings, why would they pay interest to savers for their deposits?  Why is it that deposit rates and loan rates move up and down together, the spread being fairly constant?  Why would some banks borrow from other banks (the Federal Funds market in the U.S.) if they could just create credit on their own to lend? Why would banks borrow from a central bank (at interest, typically higher than they would pay other banks) if they could create their own loans without prior savings?  Finally, if any institution (other than a central bank) could create a loan without prior savings, why would anyone want to be a borrower?

I suggested to Rob Leeson that he take a look at a good book on money and banking to understand the sources of bank funds as well as the uses of such funds (loans and investments).  I also suggested a visit with his bank manager.  The same suggestions are suitable for Avner Offer as well.

One's disposable (after-tax) income may be used to purchase consumption goods, acquire financial assets (savings), and held in cash (hoarding).
Thus, there could be increased saving without a reduction in consumption spending when people reduce their cash hoarding. Similarly, there could be a decrease in the flow of savings without an increase in consumption spending when people turn more of their income into demanding more cash to hold.

James Ahiakpor



________________________________________
From: Societies for the History of Economics [[log in to unmask]<mailto:[log in to unmask]><mailto:[log in to unmask]>] on behalf of [log in to unmask]<mailto:[log in to unmask]><mailto:[log in to unmask]> [[log in to unmask]<mailto:[log in to unmask]><mailto:[log in to unmask]>]
Sent: 19 November 2013 20:12
To: [log in to unmask]<mailto:[log in to unmask]><mailto:[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 w!
ithout l
earning 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]>"<mailto:[log in to unmask]><mailto:[log in to unmask]><mailto:[log in to unmask]> <[log in to unmask]<mailto:[log in to unmask]>><mailto:[log in to unmask]><mailto:[log in to unmask]><mailto:[log in to unmask]>
To: [log in to unmask]<mailto:[log in to unmask]><mailto:[log in to unmask]><mailto:[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]>><mailto:[log in to unmask]><mailto:[log in to unmask]><mailto:[log in to unmask]>
To: [log in to unmask]<mailto:[log in to unmask]><mailto:[log in to unmask]><mailto:[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]><mailto:[log in to unmask]>
<mailto:[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><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)





--
James C.W. Ahiakpor, Ph.D.
Professor
California State University, East Bay
Hayward, CA 94542

(510) 885-3137
(510) 885-7175 (Fax: Not Private)




--
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542

(510) 885-3137 Work
(510) 885-7175 Fax (Not Private)








--
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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