I am back from my trip and do not want to encourage any further discusion of this issue.   I think the discussion  seems to have run its course, and should be taken off line for those who are interestedc in continuing.  I will only say that I believe my point was a technical one, and had nothing to do with policy or even history of thought. My technical point was that in a multiple equilibrium dynmamic model, what looks like inefficient actions in reference to a local equilibrium might be an efficient action in reference to an alternative global equilbrium. Thus, viewing Keynes as suggesting a multiple equilibrium model  to replace the Classical single equilibrium model without a consideration of short run dynamical adjustment problems provides a way of making sense of Keynes argument in which everyone can be right in some sense.  My general view is that any issue that continues for a long time without resolution involves framing and interpretation much more than logic, and the type of short discussions we can have in such interchanges will never be sufficient to resolve the issue, or change people's minds.



Dave


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From: Societies for the History of Economics [[log in to unmask]] on behalf of Kliman, Prof. Andrew J. [[log in to unmask]]
Sent: Friday, December 14, 2012 8:31 PM
To: [log in to unmask]
Subject: Re: [SHOE] Macro Follies

I think Steve Kates point--"to argue that natural disasters, wars and useless public works ...  'enrich the community' or 'serve to increase wealth' is to my mind indefensible"--is correct, and that Keynes was wrong to claim that they enrich the community and may serve to increase wealth. It doesn't seem to me that anything said on this list about pyramid-building serves to support Keynes' case or call Kates' into question.

Indeed, it's rather curious that Keynes made this argument, given that, in a footnote to the phrase "loan expenditure," he says that it's financed by borrowing from individuals. I realize that he's discussing the issue in the context of the multiplier, but since the multiple effect is due to successive increases in spending in excess of income, which implies a depletion of wealth, it seems to me that his own theory doesn't support the claim he makes here.

Andrew Kliman

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From: Societies for the History of Economics [[log in to unmask]] on behalf of Steve Kates [[log in to unmask]]
Sent: Wednesday, December 12, 2012 11:02 PM
To: [log in to unmask]
Subject: Re: [SHOE] Macro Follies


David Colander wrote:

“I am traveling so this will be short. In a monetary economy even though real demand is tied to real supply effective demand and effective supply can be far below both. In such cases hansen's law holds-- demand creates its own supply which is what i believe keynes meant which in nuanced terms meant new effective demand creates new effective supply.”

Here is David’s key phrase: “demand creates its own supply which is what i believe keynes meant”. It is also what I believe Keynes meant but it is also why I believe Keynesian economics to be completely wrong. To come back to my previous post, I think the following passage from The General Theory is a perfect statement of the most fundamental of all Keynesian beliefs:

“The above reasoning shows how ‘wasteful’ loan expenditure may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.” (p 129)

It would be one thing to argue that natural disasters, wars and useless public works could under some circumstances and in certain conditions increase the level of employment during some specified and relatively short period of time. But to argue that they would “enrich the community” or “serve to increase wealth” is to my mind indefensible.

In this I am at one with Ricardo where he wrote in his Notes on Malthus, written more than a century before Keynes wrote his General Theory, just how nonsensical such ideas are:

“It might as justly be contended that an earthquake which overthrows my house and buries my property, gives value to the national industry.” (quoted in my Say's Law and the Keynesian Revolution: p 54)

Is Ricardo’s point not completely obvious? If it is not, economic theory has retreated to an even more primitive state than it was in 1820.

--

Dr Steven Kates
School of Economics, Finance
    and Marketing
RMIT University
Building 80
Level 11 / 445 Swanston Street
Melbourne Vic 3000

Phone: (03) 9925 5878
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