The Keynesian Revolution: A new biography of John Maynard Keynes
bostonreview.net
bostonreview.net
The Post-WWI situation was simple in a way yet strage. Germany was defeated, yet it remained the strongest country in continental Europe. Britain and France were bled dry, Russia was in chaos and the Western Front was mostly fought on French soil. This left the question of how to settle things so that Germany does not refight the war for the same old objectives.
The French position was a Realist position - make Germany too weak to make trouble. The Keynes position was Idealist, but it needed one condition to be viable in any form: a defence alliance to prevent Germany from making trouble. Which was something that was probably politically impossible in the US, and I don't recall Keynes advocating for it.
So his contribution was to help weaken one option that was politically workable without giving a good alternative; Eventually (years later) helping to lead to an arrangement that merely goaded Germany in the wrong direction. There was a need to ask how to reintegrate Germany, but this was not served well by ignoring the strategic situation.
Many people from both sides realized this but the German leadership sadly was of a more conservative mindset.
I was surprised to learn from Zweig's first-hand account how much Orwell's MiniTru was based on western behaviour during the Great War.
https://ia801609.us.archive.org/21/items/in.ernet.dli.2015.1...
p.182 "German professors declared that Dante had been Germanic, the French that Beethoven had been a Belgian, intellectual culture was requisitioned without scruple from the enemy countries like grain and ore."
[1] Among which: having remembered the iron fist but having dropped the velvet glove: https://en.wikipedia.org/wiki/Dropping_the_Pilot#/media/File...
铁拳软包?
So the Germans were able to pay? I don't pretend to be a historian, yet I've never heard the idea that Germany could pay.
BTW, the Odd Lots had a show [1] about the book recently
[1] https://www.bloomberg.com/news/audio/2020-07-12/studying-key...
> a defence alliance to prevent Germany from making trouble. Which was something that was probably politically impossible in the US, and I don't recall Keynes advocating for it.
It was actually not impossible. If you don't take the standard US history crap about how 'isolationist' are the worst thing and responsible for all bad things, its actually pretty clear that they could have gotten the WW1 resolution threw congress.
Yes there were some isolationists but that's not why all the treaties failed in the US congress.
This talk is very good on this: https://www.youtube.com/watch?v=dTBI86s0oSQ
But what about Keynes idea that Europe as a whole was in economic ruin and it was necessary to rebuild it with economic aid or it would lead to political disaster. He seems to be to have been right about that.
Everyone at the time including Keynes himself realized the German issue was the primary issue. The petty authoritarianism that affected E. Europe in the interwar years was a mild headache compared to the nightmare that followed.
Economic aid might have helped with minority rights in the new countries, but I don't think it would have done much beyond that. We would still have had the Great Depression, and we would have gotten the political disaster then.
I hate to say it, but I have to admit you are probably right.
Marx said "I am not a Marxist" when he saw his ideas being put into a something bordering a religious teaching.
And later, I think, Keynes was rather unsettled with how his works been used to legitimise a new maxim "government can print money out of thin air," from an inverse of what dominated US economic thinking before him. It was not his idea at all.
Beyond simply affirming that aggregate demand thing exists, and that a lot things in economy spin around it, he did not produce a religious edict on how to run a government monetary policy.
If he saw Keynesianists today, he would feel rather disappointed.
I don’t think it can be used forever. It’s a bit like carrying on drinking on a hangover. After a while it’s going to catch up with you and the longer you carry on the worse it will be at the end.
This is the precise opposite of the usual critique of Keynesianism: the mainstream conservative/neoclassical arguments that [i] Keynesian macroeconomics overestimates the ability of and need for governments to intervene in the economy, and [ii] that macroeconomic stability is better achieved by designing rules for fiscal/monetary policy than giving governments free reign to make decisions
Keynes did say
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again… the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
Keynes’ argument is that it would be better for the economy, in aggregate, to put these people to some end using government spending, ideally a productive one (his example, building homes for people) then remove them from the loop.
Since it's digging through a mine using drill bits to break up the rocks, you can call the idea "minecoin bitting"
And he even says right there in the quote it would be better to have people do something productive.
Isn't one of the supposed benefits of UBI that people, once no longer occupied by work in order to provide for themselves, will be free to pursue other interests? That it would enrich our lives to be free from labor prescribed by others?
Burying and digging up money is not productive; that's exactly the point. To the extent that scare resources are allocated to unproductive work, actual productive use of resources (time being one) suffers. If money-digging is more lucrative than producing food, people eventually begin to starve, increasing the demand for money-digging. If a person spends his time digging for money instead of learning something (or, indeed, planting his own garden) society is immeasurably worse-off.
The only difference is that process of production and mining is a little less obvious - to outsiders - than stuffing cash into bottles and burying it.
And of course it's privatised, which is better by definition, supposedly.
Some useful work is a byproduct. But the total of useful work isn't necessarily higher than in Keynes' example - see also Graeber's Bullshit Jobs, etc.
If you're trying to speak solely to the financial sector divorced from the rest of industry, I'd be curious to hear your thoughts on whether money-digging would be a suitable replacement.
What Keynes was concerned about was the balance of payments, and using inflation as a spring to make sure that it would always be pulled towards zero, pulling harder the farther away a nation got. The US suffers from a strong dollar policy intentionally instituted after 70s inflation that demands that the trade deficit be massive forever. A refusal to print money under those circumstances is just pawning off that debt onto individuals, and the opposite of what a "Bancor" based system would enforce (which would be a trade surplus, removing the need for increasing debt.)
In general this is not what I would consider a refusal to print money:
Excuse me, the gigantic trade deficit USA has is a product of T bill, and stacks of dollars under pillows being being a preferred saving medium of rich, and middle class all around the world. It will keep increasing even if US will put Tbills with garbage rates on the market, and print dollars completely not backed by anything.
USA needs an enormous shock to shock to change the situation with dollar being overvalued.
They key to it is stopping the profligate govt spending.
Well, what is the (your) definition of Keynesianism? Here's one TL;DR of it that I've run across:
> I would summarize the Keynesian view in terms of four points:
> 1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.
> 2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.
> 3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down.
> 4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.
* https://krugman.blogs.nytimes.com/2015/09/15/keynesianism-ex...
So I think to say that he simply affirmed that aggregate demand exists is underselling his contribution - he managed to convince all the important policymakers of the time that it was important enough to overturn their prior thinking about how to use fiscal (not monetary) policy in a countercyclical manner.
The scare quotes around money printing don't help progress the dialogue around the mechanics and consequences of government spending either. Today with a fiat currency system, the government can enact countercyclical fiscal policy by simply crediting private sector accounts, and increasing a balancing government liability electronically (note there are _no taxes involved in doing this_). No money is 'printed' (the term conveys unrealistic connotations), private sector demand deposits are simply increased electronically.
The increase of these demand deposits is not inflationary unless they are used to purchase goods and services in excess of what can be supplied at a constant price level. So when we find ourselves in a situation where 20% of the workforce is suddenly unemployed due to a shutdown of economic output, the government can spend to help stabilise aggregate incomes without risking inflation, because no-one is buying stuff otherwise (and as a result, no-one would be making any income).
It is certainly true that a number of economic schools of thought have tried to use his name to legitimise their ideas, and he'd likely be disappointed with a few of them.
The root problem with printing money is not inflation, it's wealth transfer. Printing money, whether it leads to inflation (increase in average price level--note that this usage of the term "inflation" is itself a product of Keynes, its older and more proper use was "increase in the quantity of money") or not, always means a transfer of wealth from whoever does not get some of the printed money to whoever does. In other words, it is a transfer of buying power.
In the current situation, where the transfer is spread widely across everyone and has the explicit effect of compensating people for loss of income due to no fault of their own, it is hard to argue that the transfer is a bad thing, and it won't cause much economic distortion or misallocation of resources because the printed money is going to be spent on much the same things as the lost income would have been spent on anyway. So the buying power is being used for much the same things as it was before.
However, in most cases of printing money, the transfer is very different. The way the US government has been doing it basically since the Federal Reserve existed, it is a transfer from everyone who is not a financial institution, to financial institutions. This causes serious economic distortion and misallocation of resources, because it significantly changes what the buying power is used for. That is why, for example, we have McMansions galore in the US and newly constructed office space sitting empty for years in many metro areas, while we also have many ordinary citizens having trouble making ends meet, crumbling infrastructure, and underfunded basic services: because printing money and giving it to financial institutions redirects buying power to housing purchased with mortgages and commercial construction funded with loans, instead of what the people whose buying power has been transferred away would have spent it on.
I don't understand what this means. Aren't the victims you are imagining the hypothetical people who have large amounts of money in checking, savings, or literally under their mattress? And maybe this is ignorant, but I really didn't think that was a significant segment of the population.
I've read comments like yours a million times before, so I know your take isn't unique or novel, I just have never understood it at all.
I guess I can interpret you as talking about say inflation in the 1970s, but at this point that seems like ancient history and moot.
Suppose you have ten people and the money supply is a hundred dollars, of which each person has ten. And then suppose you print ten more dollars and give them all to person #10, so that person now has 20 dollars. That is equivalent, economically, to keeping the money supply the same but taking 91 cents from each of the other 9 people and giving it to person #10: in both cases, person #10 now has 2/11 of the total money supply, and persons #1 through #9 each have 1/11. And that means their respective fractions of the total buying power have changed the same way, since the buying power of money is the fraction of the total money supply that that money is equal to. So person #10 can now buy more of the things he wants, and everyone else can buy less.
In the case of the Federal Reserve printing money under normal circumstances, person #10 is financial institutions and persons #1 through #9 are everybody else.
> Aren't the victims you are imagining the hypothetical people who have large amounts of money in checking, savings, or literally under their mattress?
The "victims" are everybody who isn't getting some of the printed money. The fact that they already have other money doesn't change the fact that they lose buying power. Nor does it matter where their other money is stored. It could even be in assets like a 401k; as long as the assets are denominated in money (your 401k balance is in dollars), the buying power they represent is affected.
> I really didn't think that was a significant segment of the population.
Everybody who doesn't get new money the Federal Reserve prints under normal circumstances is almost all of the population.
This seems to me like saying that if the size of an inch shrinks, things measured in inches will too. I mean, for the sake of argument, maybe they will shrink and maybe they won't, but the choice of inches vs. cm can't affect that; it's extrinsic. This sounds very much like something I've read for decades, that it matters greatly if oil is denominated in dollars, and it's made no sense to me in all that time.
>Everybody who doesn't get new money the Federal Reserve prints under normal circumstances is almost all of the population
People complain about stagnating real wages, but I'm unaware of exponentially declining real wages, let alone the same happening to investments, as you mention, like 401(k)s. I don't see how the details matter; if there was significant wealth transfer from almost everybody, then it would be obvious.
I think you are saying that somehow, in emotional terms, the banks are a vampiric drain on the economy. But how are they doing that? If they somehow make money vanish, then doesn't that mean it isn't circulating and causing buying power and inflation? In which case how can it matter? If all the excess money is being hoarded by a tiny number of people who are not spending it, isn't that protecting us from the ravages of inflation? If I have a trillion dollar coin, regardless of where I got it, it's nothing, unless someone takes it seriously when I say "please make me 10 aircraft carriers".
The idea that financial institutions possess all wealth is so weird I'm not sure I can believe anyone believes it. You can look up how much they are worth, would you say that the published figures are misleading, or do you think that regular public financial companies and banks are vastly outweighed by other entities?
No. Read my example of the ten people again, carefully. I don't think you have grasped it yet.
> People complain about stagnating real wages, but I'm unaware of exponentially declining real wages
I have said no such thing. I have no idea where you are getting this from. I have said nothing whatever about wages.
> if there was significant wealth transfer from almost everybody, then it would be obvious
It is obvious. See further comments below about McMansions, etc.
> I think you are saying that somehow, in emotional terms, the banks are a vampiric drain on the economy.
No. I am saying that the government is favoring financial institutions over everyone else by printing money and giving it to them. That does not mean financial institutions in themselves are not necessary. It just means they are being favored by the government, and this has negative effects and should be stopped. See my post in response to qnt upthread about misallocation of resources.
> If they somehow make money vanish
I have said no such thing. Where are you getting this from?
> If all the excess money is being hoarded by a tiny number of people
I have said no such thing. You are reading a lot of things into my post that are not there.
The financial institutions are not hoarding the money the Fed prints and gives to them. They are using it to make mortgage and commercial real estate loans, because that is what they are allowed to use it for under current policies. Which in turn means more economic incentive for people to produce things that can be bought with those loans: McMansions and commercial real estate, well beyond the amount that would actually be bought in a free market with no government interference. And, as a result, we have, as I said, McMansions galore and empty commercial real estate all over, while other things that people need or want more are unnecessarily scarce, because the economic demand that would have motivated people to produce them has been taken away and transferred to financial institutions.
> The idea that financial institutions possess all wealth
I have said no such thing. I have only said that when the Fed prints money and gives it to financial institutions, that is economically equivalent to transferring some wealth to them from everyone else. I have never said it transfers all wealth to them. I have not even said it transfers most wealth to them.
Again I think there’s a misunderstanding of monetary operations that lead to these conclusions. Banks absolutely do just sit on these reserves [1]. Banks do not lend reserves, nor do they need reserves or deposits in order to make new loans. Bank lending is constrained by the demand from creditworthy borrowers, and regulatory requirements. This [2] is a useful primer on modern lending mechanics
[1]: https://fred.stlouisfed.org/series/TOTRESNS
[2]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
They have been to a much larger extent since the 2008 crash, yes. But not before that, as the graph you reference shows. What I am saying is by no means limited to the time after 2008.
> Banks do not lend reserves
There is a minimum reserve requirement, but for virtually all banks it is minimal--3% last I checked.
> nor do they need reserves or deposits in order to make new loans
They absolutely do depend on central bank policy, precisely as your second reference says: "The amount of money created in the economy ultimately depends on the monetary policy of the central bank."
What your reference is describing is not in any way inconsistent with what I said. It is simply describing the details of how the process works. Yes, the official line is that the banks create money by making loans. But how much money they are allowed to create this way is determined by central bank policy.
Also, the very fact that banks can create money this way, whereas you and I can't, is government favoritism of the banking system. In a sane economy, banks creating money out of thin air by making loans would be illegal, since it would be considered as what it is: counterfeiting money. But in our insane economy, this practice (fractional reserve banking with maturity transformation) is considered completely normal: notice how your second reference treats the idea that banks would only lend out money that is given to them as deposits as a quaint old-fashioned misconception, instead of obvious common sense.
I take what you say as ‘losing buying power’ to mean that a lower quantity of real goods and services can be purchased for the same amount of currency. There isn’t any evidence that this has happened following the Fed’s QE programmes, despite most mainstream economists freaking out about the same point at the time.
The creation or destruction of dollars has no bearing on the purchasing power of the dollars held by anyone else. It is only when new dollars are used to make purchases in excess of existing supply constraints that you create inflation and erode the purchasing power of the currency. That is not to say it is a useless metric, but you need to look at what is being done with the money rather than just looking at the amount outstanding.
Japan is an interesting example of this with 30 years of history to look at. Money supply has expanded by multiples, while consumer prices have remained constant since the mid 1990s.
I also think this fundamentally misrepresents the mechanical operations taking place when the federal reserve “prints money” (guessing to mean QE). They are simply creating dollars to purchase bonds from the private sector - it is essentially an asset swap. The financial institutions give up their bonds, and gain dollars in return. No new money is injected into the private sector by doing this. The dollars that the banks receive usually just sit in their account at the federal reserve, not doing anything in the real world. Your examples would be more valid if discussing government fiscal stimulus programmes, for example spending $2T on infrastructure, since that is a direct injection of nominal wealth to the private sector.
AAPL in feb ~$320 AAPL today ~$385
TSLA in feb ~$900 TSLA today ~$1500
Inflation is not equal across all sectors of the economy, is a transfer of wealth that disproportionally benefits some.
It's not a matter of quantity, it's a matter of which goods and services get bought. Shifting buying power means shifting demand, which means shifting the economic incentives for producing goods and services. In the case of the Fed's QE, which gave printed money to financial institutions to back mortgage and commercial construction loans, the result was to shift production of goods and services into those sectors and out of other sectors. Hence, as I said, McMansions galore and empty commercial real estate all over the US, while at the same time other things that many people need or want are in short supply.
> The creation or destruction of dollars has no bearing on the purchasing power of the dollars held by anyone else.
Yes, it does. See above.
> you need to look at what is being done with the money
Exactly. And when the government plays favorites by printing money and giving it to particular entities, the wrong things get done with the money: too much of things that people don't want or need, not enough things that people do want or need. In short, misallocation of resources, resulting in waste and unnecessary scarcity. The historical evidence for this is massive, going all the way back to at least the Roman Empire.
Look at US private home starts [1] for example. All the misallocation was done well before QE started, and no-one was building new homes for years following the Fed MBS purchases.
Enabled by a combination of the Fed printing money and giving it to financial institutions for mortgages and commercial real estate loans, and Federal government policy requiring financial institutions to give loans to people who would not normally qualify for them, in the name of expanding home ownership.
> Private sector misallocation of credit, not public sector.
There certainly was private sector misallocation of credit, but it was enabled by the above policies plus the belief on the part of the private sector financial institutions that, if push came to shove, they would get bailed out and the loss would be put on the taxpayers, not them. Which is exactly what happened.
Yes, they are the victims. They are not a significant segment of the population any more because of the current monetary policy focused on perpetuating artificial demand. Interest rates near 0, constant inflation, and maybe even assets hyperinflation have contributed to decimate not only savings but savers. Now you are a fool if you keep any considerable amount of money in the bank beyond living expenses. This did not use to be the case.
1. Wealth is a verb, not a noun, at least at macroeconomic scales. The wealth of nations is measured by how much they do more than how much they have.
2. Governments and perhaps other large entities should spend counter-cyclically. This makes sense in terms of dampening cycles but also in terms of getting the most value for that money. If you can spend during a recession, you get a bargain.
Keynes did not advocate unlimited money printing and he would be horrified by the sheer amount of debt in modern economies.
He was critical of hard gold pegs, but didn't necessarily advocate the perhaps equally insane opposite.
Also agree about Marx. His fans misunderstand him as much as his critics. What most people associate with Marx comes more from Lenin and Stalin.
I would add Ayn Rand to the list of totally misunderstood thinkers both by her fans and her critics. She was a heretical liberal humanist, not a conservative and definitely not a reactionary.
One curious thing I've noticed is that if you have a discussion between Marxists of the classical and less Leninist sort and Randians you will find huge areas of overlap outside economics. These include technology, the notion of progress, science, the importance of education, etc.
You can see that on a Pournelle chart of political ideology which maps ideology on a 2d graph instead of just a line.
>...The x-axis, "Attitude toward the State" (labeled statism), refers to a political philosophy's attitude toward the state and centralized government. The farthest right is "state worship" and the farthest left represents the state as the "ultimate evil", preferring individual freedom.
>...The y-axis, "Attitude toward planned social progress" (labeled rationalism), refers to the extent which a political philosophy is compatible with the idea that social problems can be solved by the use of reason.
Ayn Rand and various Marxists would likely both score high on the rationalism scale (and be at close to opposite sides of the statism scale).
(There might be many other multi-dimensional mappings that work better to map political ideology, but anything is likely better than the common practice of just mapping all ideology on a single line.)