Keynesian Economics Is Hot Again
bloomberg.com
bloomberg.com
Just like this particular article is doing. It proclaims people doubted government can simulate growth and now recession has proven them wrong. Isn't it in hindsight and just one data point?
From what I can tell, these two economic theories rely on competing assumptions. Keynesian economics is the theory that results from assuming the size[0] of an economy will closely follow the amount of aggregate demand. Neoclassical economics is the theory that results from assuming the size of an economy will closely follow the amount of aggregate supply.
In microeconomics there is no such duality. Rather, there is an understanding that supply and demand are each elastic with respect to one another. We measure this and reason amount markets while thinking about two explicit quantities: the elasticity of demand and the elasticity of supply. The two numbers (and the ratio between them) will tell you a lot about the effects that various conditions will have on a market.
My question is: Is there a corresponding concept of e.g. "the elasticity of aggregate demand" in macroeconomic theory?
If so, could articles like this be made more objective by providing concrete measurements of this figure on some time scale, rather than subjectively stating things like "Keynesian economics is hot again"?
If not, what prevents or complicates the existence of such a quantity?
[0] Please correct me if I am misusing this or any other economic terms and concepts
I find this hard to understand.
Consider your local McDonalds franchise. According to this theory, if the franchisee makes more Big Macs (i.e., increases supply) the economy will grow. We know that's not true. More customers aren't going to walk in the door just because the franchisee made more Big Macs. Given that he wasn't turning away any customers to begin with, the franchisee can't make more Big Macs until more customers start walking in the door. Stated another way, supply does not drive demand, it is demand that drives supply.
This 'neoclassical economics' is balderdash that has been used to give tax cuts to the wealthy, under the guise that such tax cuts will increase supply which will then grow the economy. It won't. It is demand that drives supply. If we must use tax cuts to drive economic growth then give those tax cuts to the middle class, and raise minimum wages, because the middle class will then use the extra money to buy more Big Macs.
That presupposes that restaurateur was making fat profits. If he isn't, then increasing supply in the absence of higher demand will only result in the restaurant going out of business. But increasing demand will grow the economy even when the restaurateur is making thin profits.
People will not buy mud pies unless the price is so outrageously low that they can use the mud for their garden. The opposite equivalent of a mud pie is a product that nobody will produce except at an outrageously high price.
The world already has infinite demand. As in people already want to own an infinite amount of things.
I would love to own a thousand mansions. If someone were to mind control me and make it so that I doubly want more mansions, that doesn't effect at all whether those mansions exist.
People "wanting" things doesn't make them exist, because society already wants an infinite amount of things!
Suppy is the act of creating things of value. Demand is just the method of DISTRIBUTING those things of value. But at the end of the day, what matters is creation.
Your restraunt example doesn't work, because imagine if I had a magic machine that could instantly create hamburgers for free. I could easily find people in the world who currently "demand" this food, for me to give it away to.
THAT is what it means to "increase supply". Creating things more efficiently for less resources is the exact same thing as having a magic machine that creates things for free.
Or in other words, if you haven't created more things using less resources, then you haven't actually increased supply.
Demand is just the method of distributing those finite amount of goods.
Your musings about infinite demand and magic production technologies are not entirely uninteresting, but they miss a huge universe of much more interesting and immediately applicable ideas.
Or should I say 50's.
If we must use lowering interest rates to drive economic growth, then give those low interest rates to the middle and lower class, not the big banks.
Giving low interest rates to the middle class just inflates the housing market, which is bad for everyone, even the middle class.
In a chaotic world where the government and property rights might not exist in five years, the time-value of money is high, because the enjoyment of that money in the future is uncertain. A house might only be worth five times the annual rent, because some warlord could steal it in five years. And a bond might pay 20% for similar reasons.
The interest rate, cap rate, or P/E ratio I'm willing to tolerate for an asset is closely related to my level of confidence in future economic stability (combined with my willingness to wait a long time to recoup my investment).
What if a low natural rate of interest is just a sign of a more advanced economy where people are thinking long-term? This lines up, I think, with the fact that super low yield bonds and 100 year mortgages are common in Europe.
Why should the owners of capital automatically double their money in just ten years? Maybe we have enough capital to go around already. It seems like the owners of capital are willing to invest with much lower returns these days because there is nothing else to do.
I'm just musing about what it means. I've considered buying a house to live in with a price-to-rent ratio of 25 years. This is a lot higher than the US average, but maybe that's not a bad thing? Even if the value stops increasing, I'm patient, and I have nothing better to do with the money other than rent a nicer place. This is a mix of FOMO (if I don't buy now, I won't be able to afford later) and anti-FOMO (if the price goes down in a correction, I could buy an even nicer house, but this one is nice enough already).
Lowering interest rates to middle and lower classes builds bubbles and disincentives savings, etc.
That it doesn't trickle down to the working class is by design. It's not a mistake. They're not stupid. This is the entire point of privatization of social security. It just dumps more cash into the stock market, driving up prices, benefiting the early investors more than it benefits the new investors.
No. Macroeconomics and microeconomics are different fields for a reason. Doing this doesn't work.
"increasing suppy" does not mean "producing more goods". Increasing supply means producing more goods AND lowering prices so much that those goods are then sold.
And then consumers look at the price and will decide to buy more.
That's how supply and demand curves work.
If you lower prices so much then you may have to sell at a loss, and this is the reason smart businesses won't increase supply unless they know demand exists. Demand has to exist first. Consumers aren't going to buy your mud-pies no matter how much you lower prices.
So that's not great, but on top of that, you seem to be solely using your bad argument to inject a strong opinion about a basically unrelated matter. The parent asked about methods of measuring how different analyses of macroeconimics lean toward working off of one theory or another, and whether there are hybrids, and it appears you are just advocating that one theory is clearly right and that you know how to fix the economy.
I even agree roughly with what you're advocating, but please, we should try not to do that. Your argument is bad, so you're kind of auto-wrong here, but much worse: you are not even wrong at the person you appear to be talking to. You're just tossing wrong into the wind here, and it makes your (our) position look bad, and cheapens the discussion, which has now become just pitched disagreements.
I say this overtly hostile thing not to harm you 'petilon, because I bet you're great, and I think we're on the same team, but both because we should do the best we can to argue well, and this is the real thing I care about: we should make sure that when talking we aren't just spouting partisan parrotship, but are seriously reading and responding to what others have actually said.
The parent asked a pretty cool question -- I hope it doesn't get lost forever under the weight of the us vs. them debate that is now dominating the thread after your comment unfortunately hijacked it.
I'm not an expert either but this type of thing is incredibly hard to measure not only because of the constantly changing external forces from changing governments, technological progress, "animal spirits" etc., these things alone would make it nearly impossible, but there is also the role of money creation and very imperfectly run central banks around the world destabilizing things even much more. Think of it like trying to measure demand elasticity of bitcoins, it seems to be changing by the minute.
Anyways, this whole discussion seems like a straw man to me. How can they pit keynesianism against neoclassicism and gloss over monetarism and the importance of money and central banks? Few serious economists will defend neoclassicism as a main causal factor of recessions at this point. Comparing descendant theories of Keynesianism with descendants of monetarism would be more appropriate.
Thus, in the meantime, it'd be good to have some market intervention. Intervention in moderation, for moderation.
In other sciences such as mathematics and physics you have to prove how things works. You cannot just make up an arbitrary model and say this is how we think it works.
Consumer credit is created by keynesian now abundant that is owned by richest percent. Thus many the middle class are now debt slaves to the rich percent. This also goes for house pricing which is what caused the last economic crisis.
Keysnian economics does not take into account that printing new money, the new money does not directly go into salary inflation, it goes to factory automation. Factory automation decreases the price of goods and are thus deflationary. Software is also automation which again will have a deflationary force. One robot replaces on average 5.7 humans.
To sum it up Keysanism make the richest one percent richer and most everyone else poorer. The way Keysnaism does this is by central banks printing new debt out of nothing that the richest percentage then owns. Whats the next bubble Keynesian economics is going to create trillions of Hedge funds that may burst or subprime auto loans?
Even if the math is there to express an idea formally, it's time well spent.
Perhaps it's meant as hyperbole, but that doesn't happen in economics. Models are not arbitrary, but the result of years of hard work based on generations of research. And then the models are tested and retested against reality.
Some problems, such as economics, are important to solve even though the universe does not make it easy for us with an abundance of objective data. 'Why are food prices rising worldwide' is a bit more complicated than 'why does one body fall toward another body of greater mass', but it's just as important.
The 4 main econ drivers for the US over the next 20 years - China's ascension to number 1 world economy, pension and social security debt and lack of funding, the toll of automation and the gig economy, population growth (or lack thereof) in the US and other major allied nations.
We will embrace keynes as solutions to those problems, because that is what those in power know and are comfortable with. The fact the 2008 crises didn't end in 1930s like depression will all but assure them they are right. The question is whether or not that was a one-off lucky "save" largely successful because of the global coordination that went along with American policies (China, Japan, and Europe), and if so, will that global coordination be done for future economic crises, which seems unlikely to me based on the totality of global history.
My gripe with this is that people seem to take this as a fact that hasn't even occurred with almost 100% certainty that it will happen.
A lot can go wrong in 20 years. So far, all economies that challenged US in the past mysteriously gets IMF'd, pulling the rug out of a credit bubble that they help create by twisting the arms of the central banks that are supposed to be free from this kind of interference:
This documentary about Japanese central bank is eye opening to just how much grip the US hegemony has, one which I fail to see China being able to emulate anytime soon because of the hostage situation that US allies are finding themselves in.
https://www.youtube.com/watch?v=p5Ac7ap_MAY
The theory that states Sadam was whacked because he started to accept euro instead of the petrodollar standard makes an awful lot of sense.
IMFing is real, but also only really applicable to smaller economies. All it really is is a bailout of bad-creditors disguised as credit to bad-debtors, leaving the latter in worse shape in the end and without having helped them with immediate problems at all. This only works when the amounts in question can be ponied up by taxpayers in the IMF member countries without causing too much political trouble. When the amounts involved are large enough (e.g., in the case of Japan in '89) this just doesn't even get proposed, not least because there was very little external bad-credit to bailout! We saw some of this game played intra-Eurozone, but in the European case the taxpayer was going to have to bailout the banks no matter what, whereas in the Japan case the problems were entirely domestic.
The idea that Bush went after Hussein because Hussein's reserve currency preferences is utter hogwash. Iraq's economy back then simply wasn't remotely big enough to move that needle and lacked the potential to for decades longer. Moreover, if Iraq preferred the euro then, why not now, and where's the damage to the dollar?? The answer is that it does not matter what choice of reserve currency Iraq, Iran, or Saudi Arabia (say) prefer -- it would have made zero difference in 2003, as it almost certainly didn't. Bush had no shortage of reasons to go after Hussein -- no need to reach for conspiracy theories about that!
Two, they are already setting up parallel institutions just to prevent being IMFd that (see AIIB).
Third, they already have numerous renminbi trading deals with several countries where goods are exchanged without ever being converted into dollars.
The 2008 crisis too was followed by bad policies everywhere (e.g., competitive currency debasing and reflation attempts, QE, ...), but nowhere near as bad. In particular there was no gold standard, currencies were mostly floating, and no attempt was made to shut down international trade. Not that a gold/whatever settlement system is necessarily bad, but that floating currencies made it impossible to insufficiently devalue, as Roosevelt did.
We seem to have learned some bad lessons from the Great Depression (Keynesian economics good), but also some good lessons as well (trade good). We have also seen Rooseveltian policies applied elsewhere since then, always with terrible results. E.g., insufficient devaluation / trade killing policies have been applied a number of times in Latin America, only there the U.S. dollar plays the role of gold.
Perhaps the best way to think about credit crises is to think that the aftermath lasts as long as it takes to clear bad debts, including the processes of repossession, plus the amount of time it takes new owners to return their acquisitions to profitability. Get debtors' mothballed assets back into production by liquidating them.
Deflation, by the way, is good and unavoidable in a credit crisis. It speeds up the process of identifying and working out marginal and bad debt. It helps the poor. It helps prospective and actual new owners. The worst thing that can happen in a crisis is for assets to become non-productive and under-maintained for so long that they effectively rot/rust away and become unsalvageable, and this is what happens when governments and banks extend-and-pretend.
Keynes wrote a lot of stuff but if you consider what I think is his main idea, as mentioned in the article, "the idea that aggregate demand shortages exist and can be corrected by the government stimulus" then inflation is kind of irrelevant to that.
Also it's not the answer to the problems you mention. The policy as Keynes intended it was just to boost government borrowing and spending during recessions and then stop when the recession is over.
Keynes name does sometimes get invoked by politicians to push policies that Keynes himself wouldn't have been into.
1. Stimulating growth when organic growth is low.
2. Paying back the debt taken on to be able to do #1 when organic growth is self-sustaining again.
Politicians usually only consider #1 but conveniently forget about #2 because it doesn't suit their motives. This probably also is why conservatives and libertarians criticise Keynesianism as a leftist ploy to further big government and the expansion of the public sector.
Keynesianism implemented properly and without ideology is a reasonable strategy.
Moreover the feedback control comes at a cost. What if the cost is "the rich get richer and the poor get poorer"?
This happens automatically when growth is strong. Even if the nominal debt keeps growing, it shrinks as a percentage of the GDP, so long as the growth of the GDP is faster than that the growth of the nominal debt. So for instance, in the USA, between 1945 to 1980, the national debt shrank from 98% of GDP to 33% of GDP. The USA ran budget deficits in many of those years, but it didn't matter, because the nominal growth of the GDP was much faster that the growth of the debt.
The last 37 years aren't looking so hot. :(
Who gets to decide where the money for stimulus goes and how can I be that person so that I can enrich me and my friends?
We’ve learned this lesson a few times already.
As for the suffering, probably the social capacity to weather a depression is largely mitigated by technology. The 2008 recession was not far off from the great depression by certain metrics, but people were not starving in the street, because food (even unsubsidized food) is relatively cheap and has a predictable supply chain.
The cronysm problem can be fixed to some extent by limiting terms for every public office, ending career politicians. But don't expect Congress or any parliament to vote for such a measure.
If you have an objective, you aren't acting without ideology, and if you don't have an objective, you have nothing at which to direct at strategy. Talking about a strategy without an ideology is nonsense.
As for declaring it a non-success, and bemoaning, the supposed death of the middle class, you couldn’t be more wrong: it might be faltering in the West, and we might observe a local pressure upon the middle class, but in the Far East (China, India) the latter is very much ascendant.
Neo-Keynesian theories formulated and grounded Keynes's ideas better than he did and the field moved on. Today New classical macroeconomics and New Keynesian macroeconomics contribute methods to each other. 'Keynesian' today is just tendency or general direction.
If you want to spot dead ends in the economic thinking, you must look at schools who study the teachings of the founder and never improve upon them ('X said', 'X thought') Keynesian economics is not one of them.
The thing I've seen more is Keyenes ideas got adopted by left wingers and used as a justification to expand government and then the anti-keynesians react against that. The actual Keyenes was quite capitalistic and his ideas are not incompatible with small govenment.
Also we have to bear in mind Keynes was a free market ideologue, and said taxes should be at tops 25% of GDP.
Keynes truly helped model how to get out of recession, but he did not know the danger of government not being able to go back to a smaller state. Hayek and Friedman were more confident that it was a bad path.
The cynic in me says this is because the financial elites are comfortable with either option.
Wait, left and right economist agree on LVT?
"You might see disagreement between economists, but if you were to put a varied group of people and a set of economists in the same room, you will soon find that its everyone against the economists" -~ Milton Friedman
macroeconomics = survivorship bias
Keynesianism is simply the idea that the people in power could avert crisis doing terrible things like printing money, which is what QE (quantitaive easing) and negative interest rates is.
Of course the people in power love to have all the power. Those people love taking automatically economic resources from you(and billions of other people) and doing things like traveling the world in their private jets fighting "climate change".
I personally know those guys. They believe you should not overpopulate the world having kids, and that you should always use public transport, while they use multiple mansions and private jets consuming more energy and generating more contaminating in a single move than thousands of families do in an entire year.
But they believe they are special and they could do it. Because they are luminaries.
Keynesianism is the dogma based in Keynes that justify, the 0.1 percent automatically taking 3 or 4 percent of the wealth of the world every single year in order to "save the world".
We have not lived yet the consequences of printing that much money. Debt has grown exponentially and this can't be sustained and it will stop.
This is propaganda for us letting them double down.
For example, Keynes advocated that governments spend the money that they HAVE (saved from budget surpluses when the times are good) to help the economy recover from a recession - and it is not a bad idea, per se.
The problem is that the US government has never had a surplus in recent history (save for one year 20 years ago).
Hence money printing.
No, it's not; while Keynesians tended to view QE as necessary monetary policy given the absence of fiscal stimulus, Keynesians almost invariably viewed the crisis to which QE was the response as one which called for fiscal rather than monetary stimulus as the primary response, viewing monetary policy responses as poorly adapted to the situation and ineffective at dealing with it (which they generally turned out to be). In fact, Keynesianism as a modern school of economic policy is more about countercyclical fiscal policy than anything else.
I'm not sure there is any theoretical school behind the current de facto total reliance on monetary policy; that seems to more be a result of Congress being completely disinterested in dealing with the economy in any productive manner leaving the Fed as the only institution that is capable of acting than any coherent, theoretically grounded policy approach.
I bet it did. Old study from UCLA:
http://newsroom.ucla.edu/releases/FDR-s-Policies-Prolonged-D...
Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.
After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.
Edit: missed an important quote
"Ironically, our work shows that the recovery would have been very rapid had the government not intervened."