Thursday, August 27, 2015

Mitchell, Colander, Keynes, and Lerner.


In a recent post, Prof. Bill Mitchell says that "the roots of MMT do not lie in Keynes", but in Abba Lerner, father of functional finance and the "Milton Friedman of the Left" (here), with contributions from Marx and MichaƂ Kalecki. Warren Mosler (another leading MMTer) comments: "Totally agree! Go Bill!".

Mitchell censures Keynes' idea that "the ordinary Budget should be balanced at all times. It is the capital Budget which should fluctuate with the demand for employment."

For Mitchell,
"This is the precursor to the modern concept of the 'golden rule', which limits fiscal deficits to the rate of public investment in productive capital.
"The 'golden rule' essentially means that over some defined economic cycle (from the peak of activity to the next peak) the government deficit should match its capital (infrastructure) spending".
Equivalently, over the economic cycle social spending must be balanced.

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You would have thought that Mitchell's readers, self-described as "progressives" and avowed anti-Austerians, would share his concern.

You would have been mistaken. The online Keynesian Martyrs' Brigade was quick to howl in outrage before such blasphemy. But that's old news and it's not what drives me to comment here.

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Amongst other things, Mitchell points to a humorous anecdote Lerner included in his 1961 article "The Burden of Debt" (The Review of Economics and Statistics, Vol. 43, No. 2, pp. 139-141):
"But look," the Rabbi's wife remonstrated, "When one party to the dispute presented their case to you, you said 'you are quite right' and then when the other party presented their case you again said 'you are quite right', surely they cannot both be right?" To which the Rabbi answered, "My dear, you are quite right!"
Mitchell also references Prof. David Colander's 1984 article "Was Keynes a Keynesian or a Lernerian?" (Journal of Economic Literature, Vol. 22, No. 4, pp. 1572-1575), which includes many interesting things, among them the same joke.

According to Colander, although "Lerner was the perfect prophet of Keynes", the relationship between "Allah" and his functional finance "Prophet" was troublesome: a credible witness relates an occasion when Keynes qualified Lerner's ideas as "humbug", scolding Lerner with Lincoln's words: "You cannot fool all of the people all of the time".

For Colander, Keynes' attitude towards Lerner's functional finance was variable, and perhaps the adjective opportunistic would apply:
"As to the question of whether Keynes was a Lernerian, I suspect that depended on his mood, his reading of the political forces of the day, and the time he had to reflect upon the issues". 
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Personally, I have three reactions to this.

For one, I think it worthwhile to explore a little more the relationship between Keynes and Lerner (a brilliant if eccentric Bessarabian Jew of lower class, in every respect contrasting with the stereotypical denizen of Oxbridge).

My second reaction is that there is irony in an anti-Semite having so much in common with a character in a Rabbi joke. (As Prof. Colander may have discovered: subtlety is a bitch)

Finally, contrary to views dear to "progressives", experience shows that "progressive" is not synonymous with "smart". In fact, at times, the opposite seems a much better fit.

Friday, August 21, 2015

Why we Work so Hard?


David Kestenbaum, Planet Money host, NPR:
"In 1930, the economist John Maynard Keynes published this famous essay called 'Economic Possibilities for our Grandchildren.' He's wondering what the future's going to be like, and he makes this bold kind of prediction. He imagines that in the time of his grandchildren - basically now - we might all be working just 15 hours a week." (Episode 641, July 24, 2015)
Robert Smith, co-host:
"Think about it - 15 hours a week. This would be like, OK, OK, go to work on Monday. Go to work on Tuesday, then, TGIT, five-day weekend. And Keynes didn't detail what we would do with all of this extra leisure time. But you can imagine. He was an aristocrat. He would want us to do poetry and dance, play the violin."
As Keynes had no grandchildren, the hosts asked his sister's grandchildren how did that prediction work out for them. Apparently, not very well:
"I probably worked about 15 a day … from breakfast 'til I went to bed at night."
Kestenbaum:
"When you read Keynes's essay, you get the sense that he imagined capitalism was just this phase that humanity was going to pass through, that it was a great system for solving what he called the economic problem, for creating enough economic growth so that everybody's basic needs could be met. But he imagined that after that, people could relax. We would outgrow this habit of working all the time."
It may sound like blasphemy, but Keynes was wrong. How is that even possible?

The show offers two explanations. For one "Keynes underestimated how competitive we are": we voluntarily work hard, even if we don't need to, to have more than everybody else.

Alternatively, "Keynes probably didn't pay enough attention to the way we feel about work. Some people like their jobs," like "craftspeople who take great pride in their craft".

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I know this is just anecdotal evidence, but as the son of a man who died getting ready to go to work (after working for years 16 hours a day, six days a week), I suspect those guys didn't try hard enough to understand why some work so hard, for my dad didn't love his work and he wasn't particularly competitive. Some people work really hard because  … they have no choice.

Note that both explanations the hosts advance assume -- implicitly and without a second thought -- that people choose to work harder/longer than they actually need.

Maybe Kestenbaum and Smith should try asking those working for Foxconn, Pegatron, and others: here and here.

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But if those guys' explanations seem weak, restricted to their direct personal experiences, in something else they were spot on. Richard Freeman (Harvard economist and director of the NBER):
"I don't think he [i.e. Keynes] knew that many normal people."
Now, taking into account Keynes' opinions about the "common man", the "boorish proletariat", "those who do not know at all what they are talking about" it's easy to understand he didn't care to know many normal people. And relying -- just as the show hosts do -- in introspection and personal experience he wasn't in an ideal position to guess other people's motivations.

So, it's either that or, considering Keynes fixation on Animal Spirits (which he fully formed later, in time for "The General Theory"), he might have been trying to preempt the Great Depression, while having a go at the Webbs.

Who knows, maybe "Economic Possibilities for our Grandchildren" was Keynes' first attempt at Keynesian stimulus. Appropriately Orwellian, if you think about it.

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Episode 641, Planet Money, July 24, 2015:




UPDATE:
22-08-2015. Alfred Marshall (Keynes' mentor) and missus, Mary Paley Marshall, explain in their 1879 book "The Economics of Industry" how general slumps happen (highly evocative of Hyman Minsky's work, btw) and how the economy finally recovers:
"The chief cause of the evil is a want of confidence. The greater part of it could be removed almost in an instant if confidence could return, touch all industries with her magic wand, and make them continue their production and their demand for the wares of others." (pp. 154-155)
Maybe with "Economic Possibilities" Keynes was trying to give the Confidence Fairy a hand.