Keynes’s “Screwball Idea”

by Don Boudreaux on October 27, 2011

in Country Problems, Man of System, State of Macro

Bob Higgs’s latest post – on the bizarre Chapter 24 of Keynes’s General Theory (a chapter that, in my view, disqualifies Keynes from being regarded as a capable economist) – deserves its own link here.

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{ 46 comments }

Josh S October 27, 2011 at 11:23 am

What the blankety bleep is Keynes even trying to say there?

rbd October 27, 2011 at 12:36 pm

The beauty of it is that it can mean anything and nothing, all at the same time. Imagine yourself a professor, trying to assign a grade to such incoherent drivel.

Leonardo T. B. October 27, 2011 at 11:30 am

” together with some margin to cover risk and the exercise of skill and judgment.”

And in the best possible world, the entrepreneur ends up with a salary, as though the “efficiency of capital” is a gift of divine providence.

Fred October 27, 2011 at 11:40 am

there are no intrinsic reasons for the scarcity of capital

I thought scarcity was the first rule of economics. Why should capital be exempt? I mean, there is a finite amount of capital, right? Doesn’t that make it scarce? That statement makes no sense.

Don Boudreaux October 27, 2011 at 11:56 am

Yep. Anyone who writes that “there is no intrinsic reasons for the scarcity of capital” doesn’t have a clue about what he is writing.

All scholars err, and many scholars sometimes err big time. But such a statement by someone celebrated as an economist – indeed, as a “great economist” – is error so deep, so profoundly at odds with the most fundamental propositions not only of economics but of the world as we know it – that the person who writes such a thing reveals himself to be no economist at all and, hence, utterly undeserving of the professional accolades heaped on him.

indianajim October 27, 2011 at 8:13 pm

I agree completely.

BigEd October 27, 2011 at 9:45 pm

” . . . . . . utterly undeserving of the professional accolades heaped on him [Keynes].”

Interesting that a representative of a second rate university funded in major part by Exxon and the Koch brothers sees fit to pass that kind of judgment on the almost universally acknowledged greatest economist of the 20th Century.

Fred October 27, 2011 at 10:09 pm

Thank you for a textbook ad-hominem.

For an encore will you show us a straw man?

Justin P October 27, 2011 at 11:58 pm

plus 1

J. W. October 28, 2011 at 12:09 am

IB, why the name change?

Stephen A. Boyko October 28, 2011 at 11:40 am

Yet most state-sponsored economic development has suffered from the view that capital was a cost-free byproduct of a political process thus compromising wealth in favor of jobs.

rbd October 27, 2011 at 12:32 pm

I wonder if Keynes means that since the state can manufacture currency, capital ceases to be scarce?

Fred October 27, 2011 at 1:03 pm

Maybe he equates deficit spending to capital creation.

House of Cards & Economic Freedom October 27, 2011 at 7:13 pm

Additionally, I don’t think it makes sense to speak of the “marginal” efficiency of capital when capital itself is heterogeneous. The concept of a “margin” applies only to identical units of some good — identical glasses of water, identical sacks of wheat, identical gallons of milk, etc. We can’t lump all of these together and cogitate on the “marginal satisfaction of consumption goods in general.” Specifically which consumption goods?

Same applies to lumping capital together and speaking of “margins.”

Bastiat Smith October 27, 2011 at 12:13 pm

This passage leads credence to the claim that Keynes was helped, in popularity, partly due to his shear mastery of the English language. In other words, He uses great big multisyllabic words that sound important. So they must be true.

“No Economic sense when deconstructed” you claim? Why does that matter!?! Keynes saw himself, correctly to an extent, as the ultimate macro-manager. He thought he’d be around to consult and direct the economy wear it ‘needed’ to go. That we turn now to his writing and see that it’s little more than grammatically arranged economic lingo is telling. He, like FDR, was not a great manager of industry. He was a manager of perception, promoting the aura of solution and the suspension of due diligence.

Greg Webb October 27, 2011 at 12:19 pm

True that!

Anotherphil October 27, 2011 at 12:59 pm

“due to his shear mastery of the English language.”

Is that mastery or ostentatious logorrhea?
(wink, wink, nod)

Hey, maybe I can pen some ponderous tome on economics that the apparently inexaustible supply of lemmings will buy.

Anotherphil October 27, 2011 at 1:03 pm

inexhaustible.

Hmm word check missed that.

Greg Webb October 27, 2011 at 12:18 pm

Excellent post by Bob Higgs! One of the most important concepts of economics is scarcity. It is fine to hope that scarcity, and thus human wants and needs, will disappear, but to conclude that it will happen is silly at best. So, why do so many worship at the feet of someone so fallible?

And, Bob Higgs is exactly right in his conclusions about the effect of the low interest rate policies of the Federal Reserve. Those policies are pushing more investors, especially middle class investors, to invest in riskier investments in order to earn a reasonable return for retirement. This will eventually lead to mal-investment (given the true risk involved) and the next boom and bust cycle.

Josh S October 27, 2011 at 1:00 pm

a) He sounded really smart.

b) He told politicians what they wanted to hear–that the solution to every problem is to spend, spend, and spend some more.

c) He told economists what they wanted to hear–that the government desperately needs them to hold places of power and sovereignly direct the affairs of mankind.

Fred October 27, 2011 at 12:47 pm

But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

My eyes cross and crisscross as I read and reread this.

This is the guy who advocated for the State to engage in deficit spending, right?

This same State creates unlimited capital through communal savings as it engages in deficit spending.

Anyone got an aspirin? My head hurts.

Anotherphil October 27, 2011 at 1:01 pm

which will allow the growth of capital up to the point where it ceases to be scarce.

I’m guessing he wasn’t much of a believer in diminishing marginal utility, either.

Rick Hull October 27, 2011 at 12:55 pm

I, for one, cannot *wait* for DK to swoop in and clear this up!

Daniel Kuehn October 27, 2011 at 1:52 pm

Don told me not to feed trolls, so I’ve been trying to stay away from commenting on Higgs.

Rick Hull October 27, 2011 at 2:25 pm

DK,

Incidentally, I very much appreciate your intellectual honesty, general openness, and willingness to reach out to the Austrians. So I’d like to offer a partial apology for what was, admittedly, a bit of a cheap shot.

That said, Higgs’ post was mostly Keynes, and it is the word of the Lord himself that requires clarification.

Daniel Kuehn October 27, 2011 at 2:38 pm

And after thinking about it it was really Don that made the comment that I didn’t think merited a response – not Higgs in this case.

indianajim October 27, 2011 at 8:14 pm

Disagree.

Daniel Kuehn October 27, 2011 at 1:53 pm

There is a much more productive, much more reasonable discussion of Keynes going on two posts south of here.

House of Cards & Economic Freedom October 27, 2011 at 2:11 pm

Well, thanks for clearing that up.

tomharvey October 27, 2011 at 1:30 pm

Hazlitt on Keynes:


How does Keynes know that “there can be no doubt” that a rate of interest fixed in accordance with “the marginal efficiency of capital at which there is full employment” will be “a much lower rate of interest than has ruled hitherto”? Apparently because his personal feelings tell him so.

Almost sounds like a pretense of knowledge.

Rick Hull October 27, 2011 at 2:21 pm

Animal spirits.

House of Cards & Economic Freedom October 27, 2011 at 2:09 pm

The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save. But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond the point which corresponds to full employment.

That statement uses the same nonsensical logic as this:

“The justification for a moderately high price of a product has been found hitherto in the necessity of providing a sufficient inducement to increase supply. But we have shown that the extent of supply production is necessarily determined by the scale of consumer demand and that the scale of consumer demand is promoted by a low price of a product, provided that we do not attempt to stimulate it in this way below the point which corresponds to costs of production.”

muirgeo October 27, 2011 at 3:42 pm

I would suggest people read chapter 24 in its entirety. It’s very pertinent today’s discussions on income equality.

Google “The general theory chapter 24” and you’ll be taken to a free online version.

Keynes states, “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”

Also, ” Interest to-day rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce.”

This is actually a brilliant statement and Don has in the past recommended Martin Wolf’s book on trade, Why Globalization Works, as an authoritative summary of trade. Yet Martin Wolff basically agrees with this passage of Keynes.

See his essay; Why we must halt the land cycle
By Martin Wolf

Published: July 8 2010 22:28 | Last updated: July 8 2010 22:28

http://www.ft.com/cms/s/0/8f06df9e-8ac1-11df-8e17-00144feab49a.html#axzz1c0j7AwVK

Sam Grove October 27, 2011 at 4:47 pm

You are supposing that Don was faulting every passage in Chapter 24.

In any case, the first statement you quote is mere opinion and a flawed one at that.

The second statement is half and half, with the second part a standard premise of economics.

You find that brilliant?

Randy October 27, 2011 at 9:34 pm

Re; ““The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”

1. We don’t live in an economic society. We live in a society in which some contribute to the economy, some are supported willingly by those who contribute to the economy, and others exploit those who contribute to the economy.

2. Employment is a cost, not a benefit. There is no objective reason to believe that full employment is “good” or that not having full employment is a “fault”.

3. The distribution of wealth within the productive part of society is not “arbitrary”, but rather, in accordance with a subjective evaluation of the relative contribution. Nor is such a distribution inequitable. Political distribution, on the other hand, is both arbitrary and inequitable.

Randy October 27, 2011 at 9:38 pm

Re; “Interest to-day rewards no genuine sacrifice…”

Only politicians demand sacrifice. Producers trade value for value, and the lending of money has value.

Randy October 27, 2011 at 10:20 pm

It occurred to me today that those who think that a political distribution system would be preferable to a productive distribution system must imagine that their status within the political system would be improved, but I see no evidence from history, sociology, or any of the sciences, to support that conclusion.

Karl Smith October 27, 2011 at 5:42 pm

Keynes is sensible on this issue though I don’t think optimal.

What he is saying is this:

If you are not at full employment then the Fed should lower interest rates until either you are at full employment or the overnight rate hits zero.

If you are at full employment then the government should run higher and higher budget surpluses until the overnight rate hits zero.

In any case – he argues – the overnight rate should always be zero.

This is the same kind of thinking that led Milton Friedman to say that the rate of deflation should be equal to the natural rate of interest.

Its fine as well as it goes but it ignores the fact that to achieve this policy requires that the government raise taxes above what they otherwise would be and that has a cost unto itself.

Jim October 27, 2011 at 6:09 pm

I’ve been reading Hazlitt’s review of the General Theory. There are free versions on the Internet.

Wow. Stunning book by a master.

Sam Grove October 28, 2011 at 12:14 am

Which can be obtained here in pdf or ebook format: http://mises.org/resources/3655

Nikolai Luzhin, Eastern Promises October 27, 2011 at 7:14 pm

oh my oh my the dog sh!! around here that passes for dogma

If I have copied and pasted well enough here is the important sentence. “It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor.”

That, surely, has happened, the tombstone being the twin theories of efficient markets and diversification that are offered to explain the meaningless of investors in today’s economy. The facts are plain that shareholders have no control over the modern corporation and hence their money. They are “functionless,” left to guess at where to place their funds. Suskind’s description of stock price manipulation and earnings through the use of Repos adequately documents the fact.

Sanjeev Sabhlok October 27, 2011 at 8:00 pm

Don, Keynes was a (closet) Fabian socialist. I’ve written extensively about it on my blog. Do check out (search “keynes fabian” or some such thing). The passage you refer to is conclusive proof (if any was needed). See: http://sabhlokcity.com/2011/10/keynes-was-no-economist-at-all-a-foxy-fabian-socialist/

Given he was a Fabian, it is not a surprise that he would not use economics as a platform to preach his distorted ideas (much like Marx did). He was NOT interested in economics at all. His goals were different.

Sanjeev Sabhlok October 27, 2011 at 8:01 pm

Corrigendum – last para above should read: “Given he was a Fabian, it is not a surprise that he would use economics as a platform to preach his distorted ideas (much like Marx did). He was NOT interested in economics at all. His goals were different.”

steve October 27, 2011 at 10:15 pm

“That so long as a state of general unemployment prevails, in the sense that unused resources of all kinds exist, monetary expansion can only be beneficial [my emphasis], few people will deny. But such a state of general unemployment is something rather exceptional, and it is by no means evident that a policy which will be beneficial in such a state will also always and necessarily be so in the kind of intermediate position in which an economic system finds itself most of the time, when significant unemployment is confined to certain industries, occupations or localities.”

Hayek

muirgeo October 28, 2011 at 1:25 am

On further review of chapter 24 having never read much of Keynes it’s clear he was indeed a brilliant brilliant man.

What he wrote back in 1936 was that not only are disparities of income a result of classical economic thinking they are also economically inefficient.

Now 75 years later his words ring true with the results we see before us which Don continues to not even see as it happens before him in real time… what this brilliant man saw 75 years ago.

He’s no screwball Don… and you are stuck in the mud. the man is dead yet he’s beating people from the grave.

Invisible Backhand November 5, 2011 at 4:19 pm

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