Fairly Recently: Must- and Should-Reads, and Writings… (November 12, 2018)

stacks and stacks of books

  1. Economists’ Models: Analysis Pumps or Filing Systems? And Do Countries with Reserve Currencies Need to Fear Solvency Crises?

  2. Note to Self: Why isn’t the first rule of Federal Reserve policy “thou shalt not come even close to inverting the yield curve!”?

  3. Weekend Reading: The Riot Act of 1714

  4. Weekend Reading: John Maynard Keynes on the Baneful Consequences of Ricardo’s Rhetorical Victory Over Malthus

  5. Hoisted from the Archives: Robert Skidelsky vs. Niall Ferguson: John Maynard Keynes Is Not Kesha (Also, the U.S. Is Not Greece, and 2013 Is Not 1923)

  6. Hoisted from the Archives: Niall Ferguson Is Wrong to Say That He Is Doubly Stupid: Why Did Keynes Write “In the Long Run We Are All Dead”? Weblogging

  7. “In the Long Run We Are All Dead” in Context…

  8. Note to Self: I had thought that the question of where the sun will be in the sky so you know where to erect the sunshades was a solved problem—a problem solved in 3000 BC by the Babylonians. Apparently not…

  9. Hoisted From the Archives: The Grand Strategy of the United States of America: From 2003


  1. What is the counterfactual here? The demand factors they are talking about here are all microeconomic and not macroeconomic factors. Thus it seems to me that—unless they are assuming that the Federal Reserve is a potted plants—they affect the distribution of employment but not its overall magnitude. Remember! The economy is a general equilibrium system!: Katharine G. Abraham and Melissa Kearney: The Secular Decline in Us Employment over the Past Two Decades: “This column reviews the evidence on the main causes of the secular decline in employment since the turn of the century. Labour demand factors–notably import competition from China and the rise of industrial robots–emerge as the key drivers. Some labour supply and institutional factors also have contributed to the decline, but to a lesser extent… #labormarket

  2. Friedrich Engels (1843): Outlines of a Critique of Political Economy: “According to the economists, the production costs of a commodity consist of… rent… capital with its profit, and the wages for the labour…. A third factor which the economist does not think about–I mean the mental element of invention, of thought…

  3. Nick Rowe: Bicycle Disequilibrium Theory: “Suppose you need a bicycle to get to work. Suppose bicycles are a common property resource, because bike locks don’t work. Every night the workers deposit their bicycles in the bike bank, and in the morning it’s first come first served. And suppose that sometimes there aren’t enough bicycles to go around. So sometimes the level of employment is determined by the number of bicycles, and not by all the usual stuff. Any individual can always get a bicycle in the morning, simply by getting up early enough. But in aggregate they can’t. Fallacy of composition. A theory of when workers wake up might be interesting, and useful for microeconomists wanting to understand the distribution of employment, but it won’t help us understand what determines the aggregate level of employment… #monetaryeconomics

  4. Joseph Schumpeter on the Ricardian and Keynesian vices. The echo of bdsm practices—le vice anglais—that you hear is intentional on Schumpeter’s part, as is his feminization of Keynesians, and the misogyny. Schumpeter was a very smart but very interesting man: Joseph Schumpeter (1953): History of Economic Analysis https://books.google.com/books?isbn=1134838700: “Ricardo’s… interest was in the clear-cut result of direct, practical significance. In order to get this he… piled one simplifying assumption upon another until… the desire results emerged almost as tautologies… It is an excellent theory that can never be refuted and lacks nothing save sense. The habit of applying results of this character to the solution of practical problems we shall call the Ricardian Vice… #books #schumpeter #keynes #economicsgoneright #economicsgonewrong #historyofeconomicthought

  5. The New York Times is a sad, sad thing: Kevin Drum: Hey David: It Wasn’t “We” Who Screwed the Working Class: “I get so tired sometimes. Here is David Brooks today…

  6. Ian Buruma (2001): Class Acts: “According to Cannadine, race was not everything in the British Raj. It was not even the main point. Class was the main point. Class, status, and rank were more important than skin color, the shape of one’s eyes, or the dimensions of one’s skull. A Sultan, a Nizam, or a Pasha was equal to British royalty…

  7. Shane White (2015): The Story of Wall Street’s First Black Millionaire: “Jeremiah Hamilton made white clients do his bidding. He bought insurance policies on ships he purposely destroyed. And in 1875, he died the richest black American…

  8. Joseph Schumpeter (1953): History of Economic Analysis https://books.google.com/books?isbn=1134838700

  9. Angus Deaton: The U.S. Can No Longer Hide From Its Deep Poverty Problem: “According to the World Bank, 769 million people lived on less than $1.90 a day in 2013; they are the world’s very poorest. Of these, 3.2 million live in the United States, and 3.3 million in other high-income countries (most in Italy, Japan and Spain)… #poverty #equitablegrowth

  10. Back at the end of the nineteenth century the quest for better economic statistics was a bipartisan, bi-ideology, bi-analytic approach effort. Liberals and conservatives, reactionaries and social democrats, socialists and centrists in America all thought that good statistics would reveal that America matched their images of it and would show that their policies were good ones. We need to recover that: Austin Clemens: In an age of inequality, aggregate and mean economic statistics don’t tell us enough: “I have argued that we should disaggregate the reporting of GDP growth so we can understand who prospers when the economy grows. But we don’t need to stop there. As income inequality increases and we increasingly see two Americas—one for rich and one for everyone else—it is more important than ever to see more granular breakdowns…

  11. Anybody looking back at economic history cannot help but note that female physical autonomy and its absence has played an absolutely huge role. Kate Bahn and company are pulling together the evidence that this is not just history—that it still matters a lot in America today: Kate Bahn: Understanding the link between bodily autonomy and economic opportunity across the United States: “All of these connective threads are examined in a forthcoming paper of mine… #gender

12.Marshall Berman: All That’s Solid Melts into Air http://delong.typepad.com/files/berman_marshall_all_that_is_solid_melts_into_air_the_experience_of_modernity.pdf

  1. Simon Jäger, Benjamin Schoefer, Samuel G. Young, Josef Zweimüller: Wages and the Value of Nonemployment: “Nonemployment is often posited as a worker’s outside option in wage setting models such as bargaining and wage posting. The value of this state is therefore a fundamental determinant of wages… #labormarket

Economists’ Models: Analysis Pumps or Filing Systems? And Do Countries with Reserve Currencies Need to Fear Solvency Crises?

School of Athens

I believe that there are four issues in this Summers-Krugman-Rogoff-Blanchard et al.-DeLong internet discussion of three years ago:

  1. As far as we economists are concerned, are our models analysis pumps, or are they merely filing systems to remind us of experiential wisdom? In other words: Are our models to be taken seriously when they lead us to a conclusion that the great and good believe is unserious?

  2. Do economies with exorbitant privilege in which the key leveraged financial institutions have little foreign-currency debt need to fear banking and government solvency crises?

  3. Can economies with exorbitant privilege in which the key leveraged financial institutions have little foreign-currency debt rely on their abilty to print their way to liquidity in an emergency and on market participants’ recognition of that ability?

  4. Can economists build models and conduct analyses assuming that business expectations are reasonable things, and will not push the economy to a position that is not close to a self-consistent near rational expectations equilibrium?

As near as I can see:

  1. Larry Summers says: filing systems, yes, no, no.
  2. Paul Krugman says: analysis pumps, no, yes, yes.
  3. I say” both, no, yes, no.

I think I should, sometime over the past three years, have written a really good piece about these questions based on the ten items below. But I regret that I have not:

  • Lawrence Summers (2015): My Views and the Fed’s Views on Secular Stagnation: “Why is the Fed making these mistakes if indeed they are mistakes? It is not because its leaders are not thoughtful or open minded or concerned with growth and employment.  Rather I suspect it is because of an excessive commitment to existing models and modes of thought.  Usually it takes disaster to shatter orthodoxy.  We can all hope that either my worries prove misplaced or the Fed shows itself to be less in the thrall of orthodoxy than it has been of late…

  • Brad DeLong (2015): Musings on the Current Episteme of the Federal Reserve…: “The… errors that the Federal Reserve is currently making… are the result of an excessive commitment to some current modes of thought-…. But… are models properly idea-generating machines… or merely filing systems?… If you give even minor weight to the first… the line of work into the economics of the liquidity trap that I see as well-represented by Krugman’s (1999) “Thinking About the Liquidity Trap” tells us, very strongly, that the Federal Reserve is on the wrong track intellectually right now…

  • Paul Krugman (2015): Respectable Radicalism: “Brad DeLong… argues… Larry has it wrong, that the Fed’s problem is not an ‘excessive commitment to existing models’…. The case that the risks of hiking too soon and too late are deeply asymmetric comes right out of IS-LM with a zero lower bound…. I think I understand how being an official, surrounded by men (and some but not many women) who seem knowledgeable in the ways of the world, can create a conviction that you and your colleagues know more than is in the textbooks…. But in a world of zero-lower-bound macroeconomics… theory and history are much more important than market savvy…

Lawrence Summers (2016): Thoughts on Delong and Krugman Blogs: “Delong and… Krugman… disagree with my assertion that it reflects an excessive attachment to existing models and modes of thought…. On the supply side… if I believed strongly in the vertical long run Phillips curve with a NAIRU around five percent and in inflation expectations responsiveness to a heated up labor market, I would see a reasonable case for the monetary tightening that has taken place…. The disagreement does, it seems to me , come down to the Fed’s attachment to the standard Phillips curve mode of thought…

Lawrence Summers (2016): Thoughts on Delong and Krugman Blogs: “A desire to be “sound” also influences policy.  I am not nearly as hostile to this as Paul. I think… market thought is I think right and simple model based thought is I think dangerously wrong is Paul’s own Mundell-Fleming lecture on confidence crises in countries that have their own currencies. Paul asserts that a damaging confidence crisis in a liquidity trap country without large foreign debts is impossible because if one developed the currency would depreciate generating an export surge…

  • Brad DeLong (2016): MOAR Musings on Whether We Consciously Know More or Less than What Is in Our Models…: “Summers presents as an example of his contention that we know more than is in our models—that our models are more a filing system, and more a way of efficiently conveying part of what we know, than they are an idea-generating mechanism—Paul Krugman’s… contention that floating exchange-rate countries that can borrow in their own currency should not fear capital flight in a liquidity trap. Summers points to Olivier Blanchard et al.’s empirical finding that capital outflows do indeed appear to be not expansionary but contractionary…

  • Paul Krugman (2013): Currency Régimes, Capital Flows, and Crises: “Several commentators… have suggested that a sudden stop of capital inflows provoked by concerns over sovereign debt would inevitably lead to a banking crisis…. If correct, this would certainly undermine the optimism I have expressed about how such a scenario would play out. The question we need to ask here is why, exactly, we should believe that a sudden stop leads to a banking crisis. The argument seems to be that banks would take large losses on their holdings of government bonds. But why, exactly? A country that borrows in its own currency can’t be forced into default, and we’ve just seen that it can’t even be forced to raise interest rates. So there is no reason the domestic-currency value of the country’s bonds should plunge. The foreign-currency value of those bonds may indeed fall sharply thanks to currency depreciation, but this is only a problem for the banks if they have large liabilities denominated in foreign currency…. The historical example that comes nearest to the kind of crisis so widely envisaged–France in the 1920s–involved a very steep currency depreciation, but did not involve a banking crisis…

  • Ken Rogoff (2013): Britain Should Not Take Its Credit Status for Granted: “Debt panglossians are far too confident that the UK’s credit status is bulletproof, and too dismissive of the risks… about pension liabilities or existential threats to the banking system that could require massive injections of cash to fix…. Last but not least, what about the UK’s serial dependence on International Monetary Fund bailouts from the mid-1950s until the mid-1970s? This is hardly a country with an indestructible credit status…

  • Olivier Blanchard, Jonathan D. Ostry, Atish R. Ghosh, and Marcos Chamon (2015): Macro Effects of Capital Inflows: Capital Type Matters: “Some scholars view capital inflows as contractionary, but many policymakers view them as expansionary. Evidence supports the policymakers. This column introduces an analytic framework that knits together the two views. For a given policy rate, bond inflows lead to currency appreciation and are contractionary, while non-bond inflows lead to an appreciation but also to a decrease in the cost of borrowing, and thus may be expansionary…

  • *John Maynard Keynes * (1936): The General Theory of Employment, Interest and Money: Chapter 12. The State of Long-Term Expectation: “Enterprise…. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die…. This means… that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent;—it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends…


#highlighted #finance #macroeconomics #krugman #rogoff #blanchard #cognitive #economicsgoneright #economicsgonewrong 

Weekend Reading: The Riot Act of 1714

Wikipedia: Riot Act:

If any persons to the number of 12 or more unlawfully, riotously, and tumultuously assemble together to the disturbance of the public peace, and being required by any justice by proclamation in the King’s name in the exact form of the Riot Act, I George I, Sess. 2 c. 5 s. 2, to disperse themselves and peacefully depart, shall to the number of 12 or more unlawfully, riotously, and tumultuously remain or continue together for an hour after such proclamation, shall be guilty of a felony.

**The Form of Proclamation is as follows:—

Our Sovereign Lord the King chargeth and commandeth all persons, being assembled, immediately to disperse themselves, and peaceably to depart to their habitations, or to their lawful business, upon the pains contained in the Act made in the first year of King George the First for preventing tumults and riotous assemblies.

GOD SAVE THE KING.


#shouldread 

Weekend Reading: John Maynard Keynes on the Baneful Consequences of Ricardo’s Rhetorical Victory Over Malthus

John Maynard Keynes and George Bernard Shaw exiting the Fitzwilliam Museum, 1936

John Maynard Keynes: The General Theory of Employment, Interest, and Money: Chapter 3: “The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics, which underlie what we have been taught for more than a century. Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain…

…Not only was his theory accepted by the city, by statesmen and by the academic world. But controversy ceased; the other point of view completely disappeared; it ceased to be discussed. The great puzzle of effective demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou, from whose hands the classical theory has received its most mature embodiment. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas.

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

But although the doctrine itself has remained unquestioned by orthodox economists up to a late date, its signal failure for purposes of scientific prediction has greatly impaired, in the course of time, the prestige of its practitioners. For professional economists, after Malthus, were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation; — a discrepancy which the ordinary man has not failed to observe, with the result of his growing unwillingness to accord to economists that measure of respect which he gives to other groups of scientists whose theoretical results are confirmed by observation when they are applied to the facts.

The celebrated optimism of traditional economic theory, which has led to economists being looked upon as Candides, who, having left this world for the cultivation of their gardens, teach that all is for the best in the best of all possible worlds provided we will let well alone, is also to be traced, I think, to their having neglected to take account of the drag on prosperity which can be exercised by an insufficiency of effective demand. For there would obviously be a natural tendency towards the optimum employment of resources in a society which was functioning after the manner of the classical postulates. It may well be that the classical theory represents the way in which we should like our economy to behave. But to assume that it actually does so is to assume our difficulties away…


#weekendreading #economicsgonewrong #historyofeconomicthought #keynes #malthus 

Hoisted from the Archives: Robert Skidelsky vs. Niall Ferguson: John Maynard Keynes Is Not Ke$ha (Also, the U.S. Is Not Greece, and 2013 Is Not 1923)

Thinking how to talk about Schumpeter’s “Ricardian Vice” and the extremely peculiar boosting by economists formerly of note and reputation of the Trump corporate tax cut, and so revisiting this https://www.bradford-delong.com/2013/05/robert-skidelsky-vs-niall-ferguson-john-maynard-keynes-is-not-keha-also-the-us-is-not-greece-and-2013-is-not-1923.html


Hoisted from the Archives: Robert Skidelsky vs. Niall Ferguson: John Maynard Keynes Is Not Ke$ha (Also, the U.S. Is Not Greece, and 2013 Is Not 1923)

And Robert Skidelsky explains what John Maynard “We’ll Keep Dancing ‘Till We Die” Keynes really meant by “In the long run we are all dead”:

True, Keynes cared little about the long run. But that wasn’t because he was gay: The passage… discusses… the quantity theory of money: the notion that a change in a nation’s money supply causes a proportionate change in prices. Keynes, whose… Economic Consequences of the Peace… pointed out that “in the long run,” this relationship was “probably true.” But, he went on, “this long run is a misleading guide to current affairs. In the long run we are all dead.” Keynes always sought to present his ideas in simple, intuitive language. Here, he was only saying more strikingly what Irving Fisher, the American granddaddy of modern monetary theory, had said in 1911: that the proportional relationship between money and prices did not hold in “transition periods”…. But Keynes immediately broadened his attack to economics as a whole. The passage continues:

Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

This was a bold way of criticizing what was and still remains the dominant form of economic theorizing – developing long-run models that not only avoid the hard and interesting questions but are largely useless because they don’t give policymakers any guide on how to navigate in “tempestuous seasons.”

A few years later, Keynes was delighted to come across an exchange…. David Ricardo… accused Malthus of having:

always in your mind the immediate and temporary effects of particular changes, whereas I put these immediate and temporary effects quite aside, and fix my whole attention on the permanent state of things which will result from them.

To which Malthus replied, with considerable effect:

I certainly am disposed to refer frequently to things as they are, as the only way of making one’s writings practically useful to society, and I think also the only way of being secure from falling into the errors of the [tailors] of Laputa, and by a slight mistake at the outset arrive at conclusions the most distant from the truth.

What a shame, Keynes thought, that Ricardo and not Malthus was the stem from which economics had grown! Keynes’s focus on the short run was grounded in the philosophical principle of “insufficient reason.” If individuals have no sufficient reason to believe that a good situation today will have adverse long-term consequences, it must always be rational for them to aim to maximize their short-term good. In an essay on the conservative philosopher Edmund Burke, Keynes translated this moral principle of individual behavior into the political principle of prudence:

Burke ever held, and held rightly, that it can seldom be right… to sacrifice a present benefit for a doubtful advantage in the future…. It is therefore the happiness of our own contemporaries that is our main concern; we should be very chary of sacrificing large numbers of people for the sake of a contingent end, however advantageous that may appear…. We can never know enough to make the chance worth taking…. There is this further consideration… it is not sufficient that the state of affairs which we seek to promote should be better than the state of affairs which preceded it; it must be sufficiently better to make up for the evils of the transition….

Ferguson was quite right to say that Keynes discounted the future–but it was not because of homosexuality, it was because of uncertainty. Keynes would have rejected the claim of today’s austerity champions that short-term pain, in the form of budget cuts, is the price we need to pay for long-term economic growth. The pain is real, he would say, while the benefit is conjecture.

The principle of not sacrificing the present for the future can be seen in Keynes’s intolerance of persistent mass unemployment–sacrificing the current generation of workers to secure long-term improvements in the labor market. It emerges in his rejection of “debt bondage”–the imposition of crushing long-term obligations on borrowers, undermining their prosperity. “The absolutists of contract,” he wrote, “are the real parents of revolution.”

Personally, I think Keynes’s view of the future – as radically uncertain – is too sweeping…. But in many matters, politicians would be well advised to follow Keynes’s advice and prefer the present generation to future ones. There is only so much pain voters will tolerate. And there is insufficient reason to believe that today’s austerity will bring tomorrow’s prosperity.

Larry Summers and I would go considerably further than Skidelsky: in our view, those who think there are any long-run benefits from further steps toward austerity today simply have not done their arithmetic, which they could easily do by plugging current interest rates and the impact of austerity on human and physical capital on long-run economic potential into their formulae.

And I, at least, would not say that Keynes cared “little” for the long run. You cannot read his “Economic Possibilities for Our Grandchildren” or, indeed, Skidelsky’s Keynes biography without recognizing how desperately he wished to help make a world in which the progressive Edwardian civilization of pre-1914 could be restored and persist down the ages. I would say that Keynes cared “appropriately” for the long run.


#keynes #austerity #historyofeconomicthought #skidelsky 

Hoisted from the Archives: Niall Ferguson Is Wrong to Say That He Is Doubly Stupid: Why Did Keynes Write “In the Long Run We Are All Dead”? Weblogging

Thinking how to talk about Schumpeter’s “Ricardian Vice” and the extremely peculiar boosting by economists formerly of note and reputation of the Trump corporate tax cut, and so revisiting this https://www.bradford-delong.com/2013/05/niall-ferguson-is-wrong-to-say-that-he-is-doubly-stupid-why-did-keynes-write-in-the-long-run-we-are-all-dead-weblogging.html:


NewImage

Niall Ferguson:

An Open Letter to the Harvard Community: Last week I said something stupid about John Maynard Keynes.  Asked to comment on Keynes’ famous observation “In the long run we are all dead,” I suggested that Keynes was perhaps indifferent to the long run because he had no children, and that he had no children because he was gay. This was doubly stupid. First, it is obvious that people who do not have children also care about future generations. Second, I had forgotten that Keynes’ wife Lydia miscarried.

Niall is wrong. His suggestion was not doubly stupid. There is more.

Niall speaks of Keynes’s “In the long run we are all dead” as if it is a carpe diem argument–a “seize the day” argument, analogous to Marvell’s “To His Coy Mistress” or Herrick’s “To the Virgins”–and Ferguson sees his task as that of explaining why Keynes adopted this be-a-grasshopper-not-an-ant “party like we’re gonna die young!” form of economics, or perhaps form of morality.

But that is not it at all.

Go to Keynes’s Tract on Monetary Reform.

[Read pages 80-82, so you see the “in the long run we are all dead” quote in context.

It is not part of any carpe diem argument. Two sentences earlier we find:

If, after the American Civil War, that American dollar had been stabilized and defined by law at 10 per cent below its present value, it would be safe to assume that n and p would now be just 10 per cent greater than they actually are and that the present values of k, r, and k’ would be entirely unaffected.

Six sentences earlier we find:

[T]he [Quantity] Theory [of Money] has often been expounded on the further assumption that a mere change in the quantity of the currency cannot affect k, r, and k’,–that is to say, in mathematical parlance, that n is an independent variable in relation to these quantities.

Two sentences later we find:

In actual experience, a change in n is liable to have a reaction both on k and k’ and on r.

And six sentences later we find:

There was a decided tendency on the part of these banks between 1900 and 1914 to bottle up gold when it flowed towards them and to part with it reluctantly when the tide was flowing the other way.

Keynes is discussing not how to “seize the day” for pleasure, but rather how to use the quantity theory of money. What he is saying is that you cannot assume that you can analyze the consequences of an altered time path of the quantity of cash in the economy–n, in Keynes’s notation–without considering whether the public’s demand for real cash balances k, the public’s demand for real checking-account balances k’, and banks’ desired reserves-to-deposits ratio r will also change. This is a principle that today’s economists call the “Lucas Critique”. (No, it is not clear to me why they do not call it the “Keynes Critique.) And this critique is correct: assume that those three other variables are not themselves altered when you consider an altered path for the money stock is, as Keynes says in the sentence after “in the long run…”, for economists to set themselves too easy a task–it sweeps all the problems of analysis under the rug–and too useless a task–it generates predictions that are simply wrong.

In this extended discussion of how to use the quantity theory of money, the sentence “In the long run we are all dead” performs an important rhetorical role. It wakes up the reader, and gets him or her to reset an attention that may well be flagging. But it has absolutely nothing to do with attitudes toward the future, or with rates of time discount, or with a heedless pursuit of present pleasure.

So why do people think it does?

Note that we are speaking not just of Ferguson here, but of Mankiw and Hayek and Schumpeter and Himmelfarb and Peter Drucker and McCraw and even Heilbronner–along with many others.

I blame it on Hayek and Schumpeter. They appear to be the wellsprings.

Hayek is simply a bad actor–knowingly dishonest. In what Nicholas Wapshott delicately calls “misappropriation”, Hayek does not just quote “In the long run we are all dead” out of context but gives it a false context he makes up:

Are we not even told that, since ‘in the long run we are all dead’, policy should be guided entirely by short run considerations? I fear that these believers in the principle of apres nous le déluge may get what they have bargained for sooner than they wish.

And Hayek’s bad-faith writing yielded a lot of fruit: cf. Himmelfarb:

[S]omething of the “soul” of Bloomsbury penetrated even into Keynes’s economic theories. There is a discernible affinity between the Bloomsbury ethos, which put a premium on immediate and present satisfactions, and Keynesian economics, which is based entirely on the short run and precludes any long-term judgments. (Keynes’s famous remark. “In the long run we are all dead,” also has an obvious connection with his homosexuality – what Schumpeter delicately referred to as his “childless vision.”) The same ethos is reflected in the Keynesian doctrine that consumption rather than saving is the source of economic growth – indeed, that thrift is economically and socially harmful. In The Economic Consequences of the Peace, written long before The General Theory, Keynes ridiculed the “virtue” of saving. The capitalists, he said, deluded the working classes into thinking that their interests were best served by saving rather than consuming. This delusion was part of the age-old Puritan fallacy:

The duty of “saving” became nine-tenths of virtue and the growth of the cake the object of true religion. There grew round the non-consumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world and has neglected the arts of production as well as those of enjoyment. And so the cake increased; but to what end was not clearly contemplated. Individuals would be exhorted not so much to abstain as to defer, and to cultivate the pleasures of security and anticipation. Saving was for old age or for your children; but this was only in theory – the virtue of the cake was that it was never to be consumed, neither by you nor by your children after you.

Never mind that Himmelfarb cuts off her quote from Keynes just before Keynes writes that he approves of this Puritan fallacy–that he is not, as Himmelfarb claims, ridiculing it, but rather praising it:

In the unconscious recesses of its being Society knew what it was about. The cake was really very small in proportion to the appetites of consumption, and no one, if it were shared all round, would be much the better off by the cutting of it. Society was working not for the small pleasures of today but for the future security and improvement of the race,—in fact for “progress.” If only the cake were not cut but was allowed to grow in the geometrical proportion predicted by Malthus of population, but not less true of compound interest, perhaps a day might come when there would at last be enough to go round, and when posterity could enter into the enjoyment of our labors…

So if you do read Himmelfarb, do so with great caution: this is a strange woman indeed[1].

As for Schumpeter, in Schumpeter’s Keynes obituary Schumpeter is working as hard as he can to try to minimize Keynes’s global influence:

[England’s] social fabric had been weakened and had become rigid. Her taxes and wage rates were incompatible with vigorous development, yet there was nothing that could be done about it. Keynes was not… in the habit of bemoaning what could not be changed… not the sort of man who would bend the full force of his mind to the individual problems of coal, textiles, steel, shipbuilding…. He was the English intellectual, a little deracine and beholding a most uncomfortable situation. He was childless and his philosophy of life was essentially a short-run philosophy. So he turned resolutely to the only “parameter of action” that seemed left… monetary management. Perhaps he thought that it might heal. He knew for certain that it would sooth–and that return to a gold system at pre-war parity was more than his England could stand. If only people could be made to understand this, they would also understand that practical Keynesianism is a seedling which cannot be transplanted into foreign soil: it dies there and becomes poisonous be- fore it dies.

[“Childless”] is a truly classless move given Keynes’s wife Lydia Lopokova’s two miscarriages–the best we can hope for Schumpeter is that his self-absorption in the 1920s, 1930s, and 1940s had kept him from ever learning about them. There was when I was an undergraduate an oral tradition that Schumpeter’s “childless” was a sotto voce synonym for “homosexual”–I presume Himmelfarb picked that up from similar sources to those I heard it from.

But Schumpeter, at least, does not cite “In the long run we are all dead” as evidence for the proposition that Keynes’s “philosophy of life was essentially a short-run philosophy”. Instead, he simply asserts that Keynes’s “philosophy of life was essentially a short-run philosophy”.

Is there any evidence that Keynes’s “philosophy of life was essentially a short-run philosophy” that unjustly neglected the long run? Keynes would have denied it: Keynes would have said that he gave proper balance to the short run and the long run. But, he would have added, it is also the case–as Skidelsky quotes him in The Economist as Saviour–that:

Burke ever held, and held rightly, that it can seldom be right… to sacrifice a present benefit for a doubtful advantage in the future…. It is not wise to look too far ahead; our powers of prediction are slight, our command over results infinitesimal. It is therefore the happiness of our own contemporaries that is our main concern; we should be very chary of sacrificing large numbers of people for the sake of a contingent end, however advantageous that may appear…. We can never know enough to make the chance worth taking…

So here we have it: not Herrick or Marvell or decadent Bloomsbury. Instead, Edmund Burke. Not a heedless disregard for the future, but a sober acknowledgement of the limited power of the brains of jumped-up East African Plains Apes like us to even see the long-run, and a plea not to sacrifice those currently alive to the Dreadful Moloch of Utopian Fantasies of the Future.

Schumpeter has, I think, considerable explaining to do.

As does Hayek.

As does Himmelfarb.

The rest–the Fergusons and the McCraws and the Druckers and the Heilbronners and company? At the very least, they need to explain why they didn’t check their “In the long run we are all dead” quotes against the context, and why doing so did not then lead them to have an Inigo Montoya moment as they said: “wait a minute–this doesn’t mean what I thought it meant”.


[1] Himmelfarb, writing in 1960:

The familiar racist sentiments of Buchan, Kipling, even Conrad, were a reflection of a common attitude. They were descriptive, not prescriptive; not an incitement to novel political action, but an attempt to express differences of culture and colour in terms that had been unquestioned for generations. To-day, when differences of race have attained the status of problems–and tragic problems–writers with the best of motives and finest of sensibilities must often take refuge in evasion and subterfuge. Neutral, scientific words replace the old charged ones, and then, because even the neutral ones–“Negro” in place of “nigger”–give offense, in testifying to differences that men of goodwill would prefer forgotten, disingenuous euphemisms are invented–“non-white” in place of “Negro”. It is at this stage that one may find a virtue of sorts in Buchan: the virtue of candor, which has both an aesthetic and an ethical appeal…

That somebody could–in 1960–write of how “to-day… differences of race have attained the status of problems–and tragic problems” as opposed to 1920, when presumably differences of race were not problems? Feh!


#hoistedfromthearchives #ferguson #keynes #historyofeconomicthought #moralresponsibility #racism 

“In the Long Run We Are All Dead” in Context…

John Maynard Keynes (1923): A Tract on Monetary Reform”, pp. 80-82: “[T]he [Quantity] Theory [of Money] has often been expounded on the further assumption that a mere change in the quantity of the currency cannot affect k, r, and k’,—that is to say, in mathematical parlance, that n is an independent variable in relation to these quantities. It would follow from this that an arbitrary doubling of n, since this in itself is assumed not to affect k, r, and k’, must have the effect of raising p to double what it would have been otherwise. The Quantity Theory is often stated in this, or a similar, form…

…Now “in the long run” this is probably true. If, after the American Civil War, that American dollar had been stabilized and defined by law at 10 per cent below its present value, it would be safe to assume that n and p would now be just 10 per cent greater than they actually are and that the present values of k, r, and k’ would be entirely unaffected. But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean will be flat again.

In actual experience, a change in n is liable to have a reaction both on k and k’ and on r. It will be enough to give a few typical instances:

  • Before the war (and indeed since) there was a considerable element of what was conventional and arbitrary in the reserve policy of the banks, but especially in the policy of the State Banks towards their gold reserves. These reserves were kept for show rather than for use, and their amount was not the result of close reasoning. There was a decided tendency on the part of these banks between 1900 and 1914 to bottle up gold when it flowed towards them and to part with it reluctantly when the tide was flowing the other way. Consequently, when gold became relatively abundant they tended to hoard what came their way and to raise the proportion of the reserves, with the result that the increased output of South African gold was absorbed with less effect on the price level than would have been the case if an increase of n had been totally without reaction on the value of r.

  • In agricultural countries where peasants readily hoard money, an inflation, especially in its early stages, does not raise prices proportionately, because when, as a result of a certain rise in the price of agricultural products, more money flows into the pockets of the peasants, it tends to stick there;—deeming themselves that much richer, the peasants increase the proportion of their receipts that they hoard.

Thus in these and in other ways the terms of our equation tend in their movements to favor the stability of p, and there is a certain friction which prevents a moderate change in n from exercising its full proportionate effect on p.

On the other hand a large change in n, which rubs away the initial friction, and especially a change in n due to causes whichset up a general expectation of a further increase in the same direction, may produce a more than proportionate effect on p. After the general analysis of Chapter I. and the narratives of catastrophic inflations given in Chapter II., it is scarcely necessary to illustrate this further,—it is a matter more readily understood than it was ten years ago.

A large change in p greatly affects individual fortunes. Hence a change after it has occurred, or sooner in so far as it is anticipated, may greatly affect the monetary habits of the public in their attempt to protect themselves from a similar loss in the future, or to make gains and avoid loss during the passage from the equilibrium corresponding to the old value of n to the equilibrium corresponding to its new value. Thus after, during, and (so far as the change is anticipated) before a change in the value of n, there will be some reaction on the values of k, k’, and r, with the result that the change in the value of p, at least temporarily and perhaps permanently (since habits and practices, once changed, will not revert to exactly their old shape), will not be precisely in proportion to the change in n…

John Maynard Keynes (1923): A Tract on Monetary Reform https://delong.typepad.com/keynes-1923-a-tract-on-monetary-reform.pdf


#shouldread #keyners #monetaryeconomics #monetarypolicy #books #economicsgoneright 

Blogging: What to Expect Here…

Blogging we are going to need more monkeys Google SearchBlogging we are going to need more monkeys Google SearchBlogging we are going to need more monkeys Google Search

The purpose of this weblog is to be the best possible portal into what I am thinking, what I am reading, what I think about what I am reading, and what other smart people think about what I am reading…

“Bring expertise, bring a willingness to learn, bring good humor, bring a desire to improve the world—and also bring a low tolerance for lies and bullshit…” — Brad DeLong

“I have never subscribed to the notion that someone can unilaterally impose an obligation of confidentiality onto me simply by sending me an unsolicited letter—or an email…” — Patrick Nielsen Hayden

“I can safely say that I have learned more than I ever would have imagined doing this…. I also have a much better sense of how the public views what we do. Every economist should have to sell ideas to the public once in awhile and listen to what they say. There’s a lot to learn…” — Mark Thoma

“Tone, engagement, cooperation, taking an interest in what others are saying, how the other commenters are reacting, the overall health of the conversation, and whether you’re being a bore…” — Teresa Nielsen Hayden

“With the arrival of Web logging… my invisible college is paradise squared, for an academic at least. Plus, web logging is an excellent procrastination tool…. Plus, every legitimate economist who has worked in government has left swearing to do everything possible to raise the level of debate and to communicate with a mass audience…. Web logging is a promising way to do that…” — Brad DeLong

“Blogs are an outlet for unexpurgated, unreviewed, and occasionally unprofessional musings…. At Chicago, I found that some of my colleagues overestimated the time and effort I put into my blog—which led them to overestimate lost opportunities for scholarship. Other colleagues maintained that they never read blogs—and yet, without fail, they come into my office once every two weeks to talk about a post of mine…” — Daniel Drezner


#workingmemory #publicsphere #internet #weblogging #weblogs 

I Want a FiveThirtyEight Post-Mortem!

Across the Wide Missouri: I would like Nate Silver and company to give an explanation for this:

Midterm Election Map 2018 Live Results ABC News

I suspect that three things went on:

  1. Around 8 PM EST the model took the behavior of white southerners as indicative of the behavior of whites elsewhere in the country—and that was a mistake, for white southerners really are a different ethnicity.

  2. It really was a knife-edge situation: if the Democrats had only won the popular vote by 7 percentage points instead of 9, they would not now control the House.

  3. The left-hand graph is miscalibrated: an 85% probability should not swing up to a 95% and then down to 40% before settling at 60% and then converging to 100% with the actual Democraic seat gain being equal to the original expected value…


#acrossthewidemissouri #politics #statistics 

Weekend Reading: Keynes Quoting Malthus

John Maynard Keynes: The General Theory of Employment, Interest and Money: “The doctrine did not reappear in respectable circles for another century, until in the later phase of Malthus the notion of the insufficiency of effective demand takes a definite place as a scientific explanation of unemployment. Since I have already dealt with this somewhat fully in my essay on Malthus, it will be sufficient if I repeat here one or two characteristic passages…

…We see in almost every part of the world vast powers of production which are not put into action, and I explain this phenomenon by saying that from the want of a proper distribution of the actual produce adequate motives are not furnished to continued production. … I distinctly maintain that an attempt to accumulate very rapidly, which necessarily implies a considerable diminution of unproductive consumption, by greatly impairing the usual motives to production must prematurely check the progress of wealth…. But if it be true that an attempt to accumulate very rapidly will occasion such a division between labour and profits as almost to destroy both the motive and the power of future accumulation and consequently the power of maintaining and employing an increasing population, must it not be acknowledged that such an attempt to accumulate, or that saving too much, may be really prejudicial to a country?

The question is whether this stagnation of capital, and subsequent stagnation in the demand for labour arising from increased production without an adequate proportion of unproductive consumption on the part of the landlords and capitalists, could take place without prejudice to the country, without occasioning a less degree both of happiness and wealth than would have occurred if the unproductive consumption of the landlords and capitalists had been so proportioned to the natural surplus of the society as to have continued uninterrupted the motives to production, and prevented first an unnatural demand for labour and then a necessary and sudden diminution of such demand. But if this be so, how can it be said with truth that parsimony, though it may be prejudicial to the producers, cannot be prejudicial to the state; or that an increase of unproductive consumption among landlords and capitalists may not sometimes be the proper remedy for a state of things in which the motives to production fails?

Adam Smith has stated that capitals are increased by parsimony, that every frugal man is a public benefactor, and that the increase of wealth depends upon the balance of produce above consumption. That these propositions are true to a great extent is perfectly unquestionable…. But it is quite obvious that they are not true to an indefinite extent, and that the principles of saving, pushed to excess, would destroy the motive to production. If every person were satisfied with the simplest food, the poorest clothing and the meanest houses, it is certain that no other sort of food, clothing, and lodging would be in existence…. The two extremes are obvious; and it follows that there must be some intermediate point, though the resources of political economy may not be able to ascertain it, where, taking into consideration both the power to produce and the will to consume, the encouragement to the increase of wealth is the greatest.

Of all the opinions advanced by able and ingenious men, which I have ever met with, the opinion of M. Say, which states that: un product consommé ou détruit est un débouché fermé (I. i. ch. 15), appears to me to be the most directly opposed to just theory, and the most uniformly contradicted by experience. Yet it directly follows from the new doctrine, that commodities are to be considered only in their relation to each other—not to the consumers. What, I would ask, would become of the demand for commodities, if all consumption except bread and water were suspended for the next half-year? What an accumulation of commodities! Quels débouchés! What a prodigious market would this event occasion![39]

Ricardo, however, was stone-deaf to what Malthus was saying. The last echo of the controversy is to be found in John Stuart Mill’s discussion of his Wages-Fund Theory, which in his own mind played a vital part in his rejection of the later phase of Malthus, amidst the discussions of which he had, of course, been brought up. Mill’s successors rejected his Wages-Fund Theory but overlooked the fact that Mill’s refutation of Malthus depended on it. Their method was to dismiss the problem from the corpus of Economics not by solving it but by not mentioning it. It altogether disappeared from controversy. Mr. Cairncross, searching recently for traces of it amongst the minor Victorians, has found even less, perhaps, than might have been expected. Theories of under-consumption hibernated until the appearance in 1889 of The Physiology of Industry, by J. A. Hobson and A. F. Mummery…


#shouldread #historyofeconomicthought #keynes #malthus #aggregatedemand