Keynes and Consumption

by Don Boudreaux on November 16, 2011

in Seen and Unseen, State of Macro, Stimulus, The Economy

A couple of months ago I posted that the problem with today’s slumping economy “ain’t inadequate aggregate demand.”  My reason?

Inflation-adjusted personal consumption expenditures in the U.S. today are higher than they were in the third quarter of 2007 (the quarter before the recession began).

In a comment on this earlier post, Daniel Kuehn offered that I misunderstand Keynes – that Keynes and serious Keynesian economists do not, in fact, fret about underconsumption but, rather, about weak investment.

I have no time to do an exegesis of Keynes and the Keynesians in order to distinguish the nuances of serious Keynesianism from the vulgar Keynesianism that has been around for at least as long as mercantilism; that has never died out; that thrives today; and that, I’m confident, will continue into the distant future to be the bedrock economic ‘theory’ of the man-in-the-street who, because he spends money or runs a business or grasps simple accounting identities, is sure that he understands economics.  But I do insist that even serious Keynesians cannot so easily discount the fact that personal-consumption expenditures have recovered as being evidence of deep flaws in serious Keynesian theory.

Exhibit A: Alan Blinder’s remarks in this NPR report today on Keynes, especially these:

Princeton economist Alan Blinder says Keynes put his finger on a key economic problem – namely, that insufficient demand leads to growing unemployment.

“It’s very simple, that if there aren’t enough buyers, the sellers won’t produce,” Blinder says. “And if they don’t produce, they don’t hire workers. And if they don’t hire workers, the workers don’t have income – and if the workers don’t have income, they can’t buy stuff.”

Now I get that someone might say that what Blinder means here by “buyers” are people buying investment goods, and that these “buyers” – spooked by animal spirits – care not that personal consumption expenditures are high: these spooked “buyers” remain mired in the belief that demand for whatever outputs their investments are designed to produce will be too low tomorrow to justify making these investments today.

A more-straightforward explanation of Blinder’s remark, however, is that he’s referring to consumption spending; that, when trying to justify Keynesian theory, appeal is inevitably made to the popular, man-in-the-street belief that high consumer spending is the key to a healthy, booming economy.

In the countless convolutions Lord Keynes had to commit to make his “new economics” appear to professional economists to be something genuinely new, rather than simply a restatement of the simple-minded underconsumptionist notions that preceded The General Theory, he did try to elevate investment demand into an unusually prominent initiating factor.  But at the end of the day, neither he nor his disciples – and certainly not the politicians, business people, and ‘men-in-the-street’ who find wisdom in Keynesianism – avoid appeals to the importance of consumer demand as the alleged ultimate ‘driver’ of the economy.

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Jon Murphy November 16, 2011 at 10:26 am

It may also be worth nothing that Retail Sales (excluding autos) for the 12 months ending in September are at record levels, and growing. If you adjust for inflation, Retail Sales are 0.8% below the pre-recession level.

A lack of demand does not seem to be an issue here.

cthorm November 16, 2011 at 10:58 am

” If you adjust for inflation, Retail Sales are 0.8% below the pre-recession level.”

By what measure of inflation? CPI? There are many measures of inflation and they’re not at all the same. The Housing component of CPI, which is 1/3 of the metric, is based on rent and not home prices like Case-Schiller. Rents have been going up as the housing market collapses. It’s a good time to be a landlord but not a home “owner” paying a mortgage, unless you originated in the last two years.

Jon Murphy November 16, 2011 at 11:07 am

Yes, I used CPI (Not the core CPI).

mp2c November 16, 2011 at 10:13 pm

What percentage of time are retail sales at record levels? I would guess almost always, but I’ve never looked at the data. Naively, 0.8% below levels of 3 years ago would seem to be huge when you think about population growth, especially if they are at their post crash high (are they?).

Jon Murphy November 16, 2011 at 10:21 pm

When I am in work tomorrow, I’ll check the time frame, but I think it’s going back to the ’20′s.

And retail sales are growing on a year-over-year basis most years when the economy is not in recession.

mp2c November 16, 2011 at 10:25 pm

The retail sales growing year over year was my main point. In other words retail sales being at record levels should be the norm rather than the exception. If I’m correct on this, then I would read retails sales being 0.8% below record levels (3 years later?) as a very large demand gap.

Jon Murphy November 16, 2011 at 10:29 pm

Not really, especially since GDP and Industrial Production are much lower. 0.8% is very small.

Considering Keynesian economics focus is nominal, it should be noted the nominal Retail Sales are at record levels and growing. So, a lack of demand is not an issue.

mp2c November 16, 2011 at 10:55 pm

I’ll take a look at the data tomorrow post my follow up comment tomorrow night. I wouldn’t agree that Keynesian analysis only cares about nominal, but I think that is besides the point when we’re trying to determine if there is (or is not) a demand problem.

mp2c November 16, 2011 at 10:58 pm

BEA has real gdp being at record levels in q3 2011.

Lee Waaks November 16, 2011 at 10:40 am

If aggregrate demand is not the problem, according to Keynesians but, rather, investment, then why do they emphasize government spending as a cure for recessions? I suppose building bridges and repairing roads is investment of a sort but it is not private investment, which is the alleged problem. The reason Keynesians seem to emphasize government “investment” (I don’t deny that some of these projects will be useful even if not always an efficient use of resources) is that it spreads money throughout the economy, thereby boosting aggregate demand. It’s not as if the construction worker who receives wages from the government turns around and immediately invests in a capital project, at least not directly. He might spend part or most of his paycheck and indirectly invest the rest via an investment conduit like a bank or his 401k. But if his MPC is less than 1 isn’t that a bad thing in Keynesian’s eyes? They want him to spend every penny on twinkies and dining out. But for what purpose? To boost aggregate demand I assume, which will encourage private investment expenditure by Twinkie manufacturers.

dsylexic November 16, 2011 at 10:51 am

sounds like a plan! except for that sneaky little ‘opportunity cost’ thingy.
bernanke and his helicopter can do a better job (and efficiently) by increasing all bank accounts by x %ge than having it routed thru DoT etc

Lee Waaks November 16, 2011 at 11:00 am

Yes, I recognize the oppurtunity cost thingy. :)

Invisible Backhand November 16, 2011 at 11:14 am

…then why do they emphasize government spending as a cure for recessions?

“Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle.”

So says wikipedia. My own take is it’s more to keep food on the table until the economy recovers. Neoliberalism doesn’t care about unemployment, Keynesianism does.

SmoledMan November 16, 2011 at 11:46 am

If you want compassion for the unemployed and poor on this site – look elsewhere. Here it’s all about “sink or swim” mentality. No wonder people are waking up to the insanity of the GOP.

GrizzlyAdam November 16, 2011 at 12:00 pm

Sink or Swim 2012!

Rick Hull November 16, 2011 at 12:05 pm

Compassion doesn’t improve the plight of the impoverished. Sound economics does.

Chris Bowyer November 16, 2011 at 12:14 pm

This. Empathy never put food on anyone’s table or improved their standard of living. Real empathy means doing what’s best for as many people as possible, and that means consider the next group of people in need, too.

The kind of empathy that only cares about what’s in front of it is not empathy at all; it’s more likely superficial guilt assuasion.

Invisible Backhand November 16, 2011 at 12:15 pm

Compassion doesn’t improve the plight of the impoverished. Sound economics does.

You don’t understand. Sound economics — and the resultant self-sufficiency of workers as they all find jobs in the free market — doesn’t make us look compassionate. The goal of Keynesianism is not to help workers find jobs; it’s to keep them unemployed and to keep us (the Keynesians) occupied trying to “fix” the problem for them, so that we will appear compassionate.

Frankly, I’m surprised I have to explain this to you.

Invisible Backhand November 16, 2011 at 1:20 pm

Compassion doesn’t improve the plight of the impoverished. Sound economics does.

No disagreement there. As Thomm Hartman says repeatedly, the best welfare program is a good job.

But the economics espoused here at CafeHayek is from bizarro world. You must not buy American to create American jobs, you must buy foreign to create American jobs.

Brian Donohue November 16, 2011 at 12:32 pm

The road to Hell is paved with good intentions.

The last President who explicitly put reducing unemployment as his number one priority was Jimmy Carter.

How’d that work out?

Invisible Backhand November 16, 2011 at 12:41 pm

cite for that?

Invisible Backhand November 16, 2011 at 12:42 pm

Start stockpiling guns and ammo then.

GAAPrulesIFRSdrools November 16, 2011 at 1:02 pm

Yes, as long as we show the proper emotional disposition, that we care, that’s all that’s necessary. I’ve seen government “compassion”, and it’s as phony as it is destructive.

But hey, lets not forget the left’s monopoly on virtue.

Go back to Occupying Sesame Street.

El Diablo November 16, 2011 at 6:48 pm

Nah, they’re occupying jail cells now…

LowcountryJoe November 17, 2011 at 5:58 am

Oh yes, compassion for the unemployed! In the form of “please use the force of government to tax us all so that my preferences for compassion can be spread to those who do not share them; but please tax the other guy at a higher rate because s/he has the means to afford it.” That’s the insanity of the so-called progressives; the “your wallet or mine…ooops, would you look at that, it’ll have to be your wallet because I’m a little short at the moment.”

LowcountryJoe November 17, 2011 at 6:12 am

Where’s the compassion from the Left? Why don’t you clowns “teach the man to fish — and someplace other than his neighbors back pocket”? Is it because deep down inside you ‘compassionate types’ don’t know how to teach someone to be productive through bringing value to any transaction of goods or services? I think that’s it!

If one has a fundamental mistrust in the natural order of things that cause markets to emerge, how in the hell can that someone teach others how to participate in the natural world without resorting to outright dependence on the collective along with the coercion needed to instill an unnatural and elusive concept like social justice?

SmoledMan November 17, 2011 at 12:14 pm

So let the man and his family starve because he can’t fish for himself right now? That’s the motto of the GOP for 2012?

LowcountryJoe November 18, 2011 at 12:59 am

So let the man and his family starve because he can’t fish for himself right now?

Why should he starve? You’ve got his meals and those of the rest of his family covered, right, Mr. Big Heart? And while you’re taking care of his sustenance send him my way and I’ll teach him to catch his own fish so that he’ll be less of a financial burden on YOUR generosity, okay?!

Nuke Nemesis November 17, 2011 at 1:43 pm

The primary concern isn’t to make ourselves feel better by spending other people’s money on a people we feel are more deserving.

You can’t eat compassion. The poor and unemployed need jobs.

Jon Murphy November 17, 2011 at 1:46 pm

You can eat compassion. It tastes like the salty-sweet tears of the oppressed.

Greg Webb November 17, 2011 at 10:00 pm

Then, tell them to get off their ass, clean themselves up, and apply for available jobs. Nothing happens unless you make it happen.

Invisible Backhand November 16, 2011 at 12:09 pm

Neoliberalism doesn’t care about unemployment, Keynesianism does.

And that should adequately explain why unemployment, which was about 7% when Bush left office, shot up to 10% after Zerobama took control and implemented all that wonderful Keynesian stimulus.

We crypto-Marxist Keynesians care about unemployment so much, we’d like to see more of it. We like unemployment because it gives us an excuse to show everyone else (as well as to convince ourselves) how morally narcissistic we are: We’re good! We care! We’re good. We care! . . .

The more unemployment there is, the better we look to ourselves and the more we can fool others into thinking we’re good.

That’s why Keynesians care about unemployment.

That’s all I have to say now. May handlers at Anonymous and thank you for listening.

Yours in stagnation and unemployment,

Invisible Backhand

Invisible Backhand November 16, 2011 at 12:40 pm

History began on Jan 20, 2009.


Invisible Backhand November 16, 2011 at 6:53 pm

Irritable Bowel, did you slip your restraints again? Dr Muirgeo will get you for this. And, why are you so obsessed with this Ken? Who is Ken? It’s just you and me, brotha.


Invisible Backhand

Invisible Backhand November 16, 2011 at 8:55 pm

You’re so cute when you’re gobsmacked.

tdp November 16, 2011 at 2:06 pm

The government, a single entity controlled by politicians and bureaucrats who know nothing about economics and only care about getting reelected, is WAY less reliable about making sound investment decisions and using resources efficiently. As often as malinvestment occurs in the private sector, it occurs far more severely and consistently in the public sector. The most egregious case of malinvestment in recent memory (2008) was triggered by government intervening in the economy and distorting market signals in the first place.

kyle8 November 16, 2011 at 2:37 pm

And even if they were all geniuses with the best of intentions and no politics played into their decisions they still could not outperform the market in deciding the best use for investment capital.

They simply would not have enough information.

Invisible Backhand November 16, 2011 at 10:42 pm

In other words, Keynesian policies should be seen as another name for “welfare.”

(But the left must never use that word in public. Just call it “Keynesian policy” — works all the time.)

cthorm November 16, 2011 at 10:55 am

Don – Arnold Kling said something very similar yesterday as well. But which component is making inflation-adjusted consumption rise? Nominal wages wages haven’t risen. It’s either deflation or lower savings rates, or some combination of the two.

Normally I would be making the point that some deflation is a good thing, but I don’t think that’s true when the economy is weak. When the economy is strong you get rising purchasing power for consumers, but when the economy is weak you’re very likely to get a debt-deflation cycle. I think Scott Sumner is right, that the economy will recover most quickly with short term inflation and long-term deflation, and the best method to promise that credibly is NGDP targeting. I really think Hayek and Friedman would support such a policy. For that matter if Keynes had not died so young, I don’t think we would see him as an opponent of Hayek; Keynes was always a fickle man that was quick to change his opinions, Hayek certainly thought he would scoff at what Keynesians proposed after his death.

Jon Murphy November 16, 2011 at 10:58 am

It’s a lower savings rate. Prices are rising.

cthorm November 16, 2011 at 11:04 am

Savings rates HAVE fallen, but only in the last 3-5 months. Before that they were quite elevated. When I last checked in Q1, personal debt burdens in the US were at the lowest level as a percentage of income since the early 90s.

SmoledMan November 16, 2011 at 11:49 am

So what you’re saying is people have been paying down debt for the last several years. I thought deleveraging was a bad thing according to Keynesian?

cthorm November 16, 2011 at 2:08 pm

I didn’t say it was bad, it just is. I’m not a “Keynesian” – I’ve been reading and commenting here (albeit sparsely) for some time; I’m broadly free market/Hayekian and a monetarist in the context of the current system.

I’m not so sure that people were really paying down in aggregate (though I’d like that), I suspect the bulk of the decline in personal debts were due to foreclosures and defaults.

kyle8 November 16, 2011 at 2:39 pm

Actually I think it more likely that it is a result of millions of people having finally paid off most of their short term credit card debt.

Eventually things were out and you have to go shopping again. This might be the beginning of a way out of the current economic slump. But there are still big minefields ahead like for instance the Euro debt crises.

dsylexic November 16, 2011 at 10:59 am

oh dont modern keynes aka krugman is on board the NGDP sumner express.

cthorm November 16, 2011 at 11:06 am

Wouldn’t you rather him be on the NGDP express than the Fiscal stimulus train? I’d much rather have stimulus done through monetary policy, at least the spending is directed by individuals as they see fit.

Methinks1776 November 16, 2011 at 11:27 am

As Krugman said in 2002:

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Invisible Backhand November 16, 2011 at 11:36 am

And I was on the grassy knoll, too

One of the funny aspects of being a somewhat, um, forceful writer is that I’m regularly accused of all sorts of villainy. I was personally responsible for the demise of Enron; my nonexistent son worked for Hillary; etc.. The latest seems to be that I called for the creation of a housing bubble — in fact, the bubble is my fault! The claim seems to be based on this piece.

Guys, read it again. It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.

Update: A gracious, sensible explication from Arnold Kling.

cthorm November 16, 2011 at 11:37 am

Yep, that is exactly what happened. That’s one of the problems with the existing monetary policy regime, it has no intention of ever allowing deflation to balance out the bubbles. NGDP targeting is different, you aren’t targeting constant 2% inflation, you’re targeting a composite of real growth and inflation. With NGDP targeting real growth can crowd out inflation, so you have to allow deflation or lower government spending to keep to the target. This also has the potential to make the Fed a lot less “discretionary.”

Methinks1776 November 16, 2011 at 11:53 am


Do you really think that in light of political pressure, the Fed can ever be less “discretionary”?

Brian Donohue November 16, 2011 at 12:37 pm

Just awesome! Paul Krugman for president!

cthorm November 16, 2011 at 2:13 pm


That is exactly why I said “potential.” I think it’s a possibility but I’m skeptical of whether or not the Fed would really be less discretionary. Regardless, as long as we have a central bank (and I don’t see how that is going to change anytime soon) the more that monetary policy is rule-based and predictable the better. In this context the best Fed is a caged velociraptor, hyper aggressive in a narrow context, but utterly passive otherwise. If we can keep the Fed to a strict target we’d have a monetary policy that effectively forces downsizing of inefficient Federal spending. What Hayekian doesn’t want that?

Methinks1776 November 16, 2011 at 2:43 pm


I’m not arguing the merits or demerits of NGDP targeting.

Theoretically, the Fed has a very limited mandate now. Like every other increasingly unaccountable government body, it does not remain within the boundaries of its mandate. I have no expectation that it will remain within any new boundaries either. It’s an organ of central planning and there’s no reason to believe that will ever change.

LowcountryJoe November 17, 2011 at 6:23 am

It was actually quite slick for that weasel, Krugman, to advocate for something by quoting someone else. As it has all played out, it only reinforces, in my mind, his slippery character.

Lee Waaks November 16, 2011 at 10:58 am

Although it’s fun to poke fun of Krugman for his “Alien invasion” comment, it beautifully illustrates what’s wrong with Keynesianism and certainly bolsters D. Boudreaux’s assertion that Keyensians fetishize aggregate demand, not investment. Expending resources on war materiel to repel an alien invasion is not “investment” in the ordinary usage of that term, meaning investment in goods we really want, e.g. ipods, cars, etc. (of course, we don’t want to be ruled by aliens and the expenditure on resources to repel the aliens should be considered legitimate investment if the scenario was real). So, if spending on war materiel is not investment we really want, what’s the point? Again, to boost aggregate demand.

Scott Scheall November 16, 2011 at 11:01 am

Keynesians trying to have it both ways…you don’t say!

A few questions that I’ve had for a while now and which no one can seem to answer for me are the following: as I understand Keynes, a recession appears as a consequence of “excessive” savings (meaning, in essence, that consumption / aggregate demand is insufficient to absorb the supply of goods on the market), yet, savings rates have been falling fairly steadily for the last 30 years. So, are savings rates still “excessive”? They must be, if they are to explain the Great Recession. Moreover, would a Keynesian advise, say, all of the currently indebted and unemployed, to take on more debt, so as to further lower the aggregate savings rate? Further, thinking purely in terms of aggregates, shouldn’t the macroeconomy be comparatively more robust when savings rates are at their historical lows? So, Keynesianism fails as an explanation of recessions, right? I’d like to understand why I’m wrong about this, what I’m missing, etc., because it seems so simple…

kyle8 November 16, 2011 at 2:42 pm

Excessive savings is a bit of a misnomer. The investor class may have just moved more of their capital into things like municipal bonds or treasury bills.

So the money is still being invested, but not in things that will spur the economy.

Scott Scheall November 17, 2011 at 12:57 am

But, presumably, funds invested in government securities are spent by the government, so, selling off, say, a corporate bond and using the proceeds to purchase a government bond should leave aggregate demand more or less unaffected, no?

kyle8 November 17, 2011 at 7:00 am

exactly, which is why Keyensian focus on aggregates is wrong.

Scott Scheall November 17, 2011 at 10:44 am

I’m not denying that it’s wrong. I’m trying to figure out how Keynesians can explain away what seem to be apparent failures of their system.

@misesiantexan November 19, 2011 at 7:23 am

Brilliantly argued! I’m suggesting to all my unemployed and underemployed friends that they take out loans forthwith to stimulate the economy and take my money out of gold and stocks to “invest” in government bonds, I need to do my part to stimulate the economy! I should consider getting loans against my autos to improve my aggregate demand, what have I been thinking? Oh, right, that successive Keynesian bubbles have effectively misallocated and destroyed all capital and savings that could have been invested or spent now by artificially consuming them in the past. Are we in the long term yet, because I’m not dead?

Scott Scheall November 20, 2011 at 10:54 am

Haha…love the final comment. “In the long run, we’re all dead” is the paradigmatic pithy Keynes quote in that it is a) false and b) deleterious. It sounds so clever, until you spend a split-second thinking about it…who are the “we” who are supposedly all-dead in the long run? Everyone alive right now (including a newborn leaving the womb right now as I type)? If so, why should economics not care about those born tomorrow or next month or next year? Does he mean by “we” the species homo sapiens? If so, then (presumably) the long run is way off. If he means the latter, then, by definition, we are in the short run so long as there are extant instances of this species.

Now, I know that I’m being pedantic, and that the quote was never meant to be taken so literally, but, if it’s not meant to be taken literally, how exactly is it supposed to be taken and, more importantly, what is the value of this quote (ever repeated) for the science of economics?

Don November 16, 2011 at 11:06 am

An observation and two questions:

I observe that, from a “man-in-the-street-trying-to-get-a-handle-on-economics” point of view, that Keynesians appear to be diagnosing and treating symptoms and not problems. For example they see the lack of growth in GDP as low aggregate demand, so they attempt to inflate demand with government spending.

Is this actually the case, or am I going off the rails?

Second, it would seem to me that, as a whole, GDP is probably not the best measure of how we are doing economically. It might be better to measure growth in Gross Domestic Wealth, e.g. the value of the property in the country. And, specifically I’d break this down into Consumer Wealth (cars, houses, toothbrushes, refrigerators), Productive Wealth (e.g. what businesses own and use to generate wealth, e.g. capital stock and inventory), and Government Wealth. I would think these 4 numbers would give a much better idea of where we are and where we are going as a country economically. Again, is this a bad idea (or is it simply useless mental masturbation)? I guess we’d still need to know consumption numbers and GDP to make a full picture, but it’s as if we are trying to figure out what America looks like by looking out the window at the building across the street.

Blind men and an elephant time.

Jon Murphy November 16, 2011 at 11:12 am

I’d like to address your second question first:

I agree with you statement about GDP. It doesn’t take into account wealth generated (how do you measure Google, which has no profit?) It makes imports look bad (by subtracting them). Personally, I like US Industrial Production. It’s monthly (as opposed to quarterly), it’s revised less often, and it correlates well with GDP (after GDP revisions).

The “wealth” idea has been tried before. France is trying to do something similar and so is Venezuela. But it is hard to place value on some things. For example, how much value do you place on medical expenditures? How much value do you place on Google?

As for your first question, that is my understanding.

Whig November 16, 2011 at 11:31 am

Call me naïve, as I’m new to the intricate workings of Keynesian economics, but wasn’t their view refuted by Jean-Baptiste Say, of “Say’s Law,” which Lord Keynes misinterpreted, setting up a straw man, which has thus led to the erroneous, and current view, that demand is what drives the economy?

kyle8 November 16, 2011 at 2:50 pm

Keynes would not admit to misrepresenting Say’s law. But in a practical way of speaking you are correct.

To the Keynesian it is aggregate demand that is the single biggest factor in whether an economy is in recession or growth.

It is true that some actions of government may have a mild stimulative effect on demand in the short run. However, that is a very weak thing to peg an entire economic philosophy on.

We know for a fact that creating a very large amount of public debt is harmful. So it only goes to reason that if you wish to incur a titanic level of debt you must have a very good reason.

You must be very very certain that the cost will be countered by growth. However, no such certainty exists. The Keynesians cannot even prove that recessions in which there was a lot of government spending lasted for a shorter time than other recessions. There is simply no proof.

Gary Anderson November 16, 2011 at 11:35 am

It depends upon where the aggregate demand is occurring. I doubt if main street is seeing a big boost in aggregate demand, but the wealthy stores have certainly seen it.

SmoledMan November 16, 2011 at 11:52 am

Especially Apple stores. A family of 4 walks in and they walk out arms filled with iPhones, Macs, iPods and accessories with a smile on their faces.

Gary Anderson November 16, 2011 at 12:00 pm

An exception to the rule. You know that. Some is work and school related as well.

Methinks1776 November 16, 2011 at 12:29 pm

Thing about aggregates is that they don’t differentiate what’s happening anywhere. They’re aggregates. One, fat total that tells you nothing about what’s happening in any particular segment of the economy.

Randy November 16, 2011 at 1:35 pm

Yeah, I was trying to think of how long a business would last if the management focused on some “aggregate” measure when trying to solve problems, rather that digging into ROI, contribution margins, etc.

Methinks1776 November 16, 2011 at 3:02 pm

I can only imagine pitching a potential investor with “aggregate demand is up, so I’m sure we’ll sell tons of fried tire rubber chips for a huge return on your investment.”

The only place that pitch would work is if I were seeking taxpayer funding from congress.

g-dub November 19, 2011 at 6:43 pm

Some watch the PMI.

GrizzlyAdam November 16, 2011 at 12:07 pm

I’ve heard this argument a lot lately… “spending creates demand”. My experience, limited as it is, suggests the exact opposite is true. Demand creates spending. In other words, when a producer creates a product that meets some want or desire, people will buy it. Consumers – unlike governments – don’t spend indiscriminately simply for the sake of spending.

Methinks1776 November 16, 2011 at 12:18 pm

Isn’t that what negative real interest rates are meant to get you to do? Spend indiscriminately, that is?

Gary Anderson November 16, 2011 at 12:19 pm

It all depends on discretionary income and access to credit. This Christmas will be terrible. And the world economy will reel because of it.

Methinks1776 November 16, 2011 at 12:35 pm


I followed the link to your web page. You claim that because of the economy your books are now selling for $0.99. Are you certain it’s the bad economy and not that nobody just happens to find your books worth reading? I mean, the best sellers are just flying off the shelves still, yet you’ve resorted to giving your books away.

Have you considered that maybe you overestimated the demand for “tempered outrage”? Perhaps the market for genetically inclined cranks railing mindlessly about the evils of speculation is just plum saturated.

g-dub November 20, 2011 at 1:49 pm

hah! I was having similar thoughts.

(I buy a lot of books, and mostly find them on the used market. I almost always pay more than 99¢. I can’t remember when I got one that cheap.)

Daniel Kuehn November 16, 2011 at 12:33 pm

Whether this matters/registers or not – my only point on the earlier article was that there’s nothing about a steady level of PCE does not tell you that “the source of the problem ain’t inadequate aggregate demand”.

I also wouldn’t want to be attached to the idea that we shouldn’t be concerned about shortfalls in consumption. That’s going to impact aggregate demand and employment too obviously. Indeed – that’s going to impact investment. It’s not that consumption is nothing to fret about – it’s just that it’s not the main point when we say that we’re worried about aggregate demand.

Lots of people slip into talking about household purchases. OK – not exactly right, but at least they get that it’s a demand story. For the layperson that doesn’t bug me.

What was amazing was to read this sentence in the original post: “The problem isn’t that consumers aren’t spending; it’s that businesses aren’t investing.” In a post titled “The Source of the Problem Ain’t Inadequate Demand”. Just look at that sentence. Maybe it doesn’t read this way to the layperson, but to me (in the context of his own title) that reads like Don had written “The problem isn’t inadequate aggregate demand; it’s inadequate aggregate demand!”

I’ve been making the point on my blog for a while now that the heart of the Keynesian story is the behavior of investment, and any repercussions for consumption (so it’s up – is it at trend, though?) are secondary effects. If this is Don’s point too that’s great. I don’t personally begrudge laypeople who don’t make that distinction – I’m just glad if they talk about “demand” of some variety. However, in discussions in the corners of the econ blogosphere where Keynes gets discussed on a regular basis, people should really be able to make this distinction.

When I talk about the recession with my wife or my brother, I don’t get that specific. When I talk about the recession on Cafe Hayek (which clearly has taken a special interest in Keynes), there’s really no good reason not to.

Methinks1776 November 16, 2011 at 1:00 pm

Maybe it doesn’t read this way to the layperson, but to me (in the context of his own title) that reads like Don had written “The problem isn’t inadequate aggregate demand; it’s inadequate aggregate demand!”

Sweet Lord Keynes, you’re right!

That, of course, begs the question: why is investment spending so low?

And the Keynesian Chorus (where Krugman is a soloist) answers: Because aggregate demand (and by this, we must conclude they mean consumer demand) is so low.

Can it also because of regime uncertainty?

No!, Screams the Keynesian Chorus. Surveys of businesses show that their top concern is demand for whatever product they produce. Higher taxes and looming regulations are their second and third highest concerns, so they can’t be the problem.

It’s aggregate (consumer) demand, stupid (Higgs)!

Methinks1776 November 16, 2011 at 1:15 pm

For prominent Keynesians of our day, no other reason for inadequate investment spending can possibly exist, it all boils down to underconsumption.

Sure, in theory, other reasons can exist (as Danny Kuehn has emphatically declared in the past). Theoretically. But, all evidence of other reasons for sluggish investment is routinely ignored by the Keynesian Chorus in favour of pushing underconsumption as the root evil. What are we to make of that?

Daniel Kuehn November 16, 2011 at 1:17 pm

Just for the record I’ve said numerous times that regime uncertainty is a very reasonable argument for why investment demand is low.

What I think people really get concerned about is when it’s presented as an alternative to the far more obvious reasons for weak demand that we have.

Methinks1776 November 16, 2011 at 1:40 pm

You have said that and this bitch troll acknowledged that you have.

However, you have also maintained (as far as I can tell, until today) that at this particular time, regime uncertainty is not a problem. Have you now changed your mind and switched to worrying that people will think it’s the only thing that matters?

BTW, regime uncertainty is the only thing government has direct control over. It should be much more worried about it much more.

Methinks1776 November 16, 2011 at 1:42 pm

much more much more. ah, editing.

Methinks1776 November 16, 2011 at 1:49 pm

Also, DK, whether you’ve changed your mind or not, the prominent Keynesians (like Krugman) are still rejecting it as a possibility. In fact, Krugman recently proposed piling on regulations to drain what he considers excess cash reserves. I think you’ll readily concede that Romer and Krugman are far more influential than you are.

Randy November 16, 2011 at 1:49 pm

I took it as much more worried much more of the time… and that works :)

Daniel Kuehn November 16, 2011 at 1:57 pm

re: “Also, DK, whether you’ve changed your mind or not, the prominent Keynesians (like Krugman) are still rejecting it as a possibility.”

And I’d just say those sorts of people have their priorities straight but leave some nuance out.

That’s much better – in my view – than people who have their priorities out of whack and</i< get the nuance wrong.

Anyway, even if Krugman writes a sentence like “regime uncertainty is not a problem”, do you really think that means “the level of investment is completely insensitive to regime uncertainty”, or do you think it just means “I can’t believe we’re still talking about regime uncertainty when there are much more substantial causes at hand to talk about”.

I cannot read Krugman’s mind and have never claimed to. I can make educated guesses (and when Krugman, DeLong, and others have clarified their statements in the past my educated guesses have stood up pretty well). My educated guess is he means “I can’t believe we’re still talking about regime uncertainty when there are much more substantial causes at hand to talk about”.

Daniel Kuehn November 16, 2011 at 1:57 pm

html FAIL

Methinks1776 November 16, 2011 at 2:20 pm

Right. Why bother worrying at all about government threatening business (something government has complete control over) when we can advocate for useful things – like the construction of ghost cities for instance (yah, I know Krugman isn’t specifically advocating ghost cities from the grassy knoll, but he advocates similarly useless spending in the name of stimulus)?

Come on, Danny! Krugman plainly said in a televised interview that concerns about regime uncertainty are an attempt to malign Herr Obama. It doesn’t exist. This despite the fact that the very surveys he relies on to declare that underconsumption is the entire reason (and convenient excuse for stimulus) for sluggish investment show that regime uncertainty (rising taxes and increased regulation) is just behind the decline in demand on the list of top concerns for business.

Just exactly how much “nuance” are Keynesians willing to ignore in their quest to make sluggish investment all about consumer spending? How much are YOU willing to ignore?

Dan H November 16, 2011 at 2:23 pm

I actually work out at the same gym as a VP of a large regional bank (a Fortune 500 company). We often chat in the morning while getting ready for work after working out. Today he actually said “We’re just waiting. Like every other bank. We have no idea what regulations are coming down the pipe. We’re still trying to figure out what’s in Dodd-Frank and how that will impact us. We’re also ‘supposed’ to still be in compliance with CRA standards, but the government has taken a break from enforcing that right now, but is that forever or are they going to come back and say we need to be in CRA compliance? Uncertainty is killing every bank.”

Regime uncertainty is certainly a huge factor, especially for regional banks, which were among the healthier banks after the collapse.

Methinks1776 November 16, 2011 at 2:23 pm

Also, if they are willing to ignore all other reasons for sluggish investment save underconsumption, then how can you claim that Keynesians aren’t undersconsumptionists?

Methinks1776 November 16, 2011 at 2:34 pm

Dan H,

Tell that guy not to worry about these little nuances.

In trading, volume has fallen off dramatically. In other words, the demand for my product has fallen. One of the reasons is that regulation has made hedging more expensive. Lower volumes have lead to wider spreads. In other words, regulation has sucked liquidity out of the market. That has contributed to increased market volatility. Increased market volatility scares people away from trading, but especially if it has become to expensive to hedge. It’s a loop.

Certainly, the market risk premium has increased, which means the cost of capital has increased and that means that companies will face e a higher hurdle rate for new investments. How do you suppose this will impact future investment?

Greg Webb November 16, 2011 at 2:36 pm

“We’re just waiting. Like every other bank. We have no idea what regulations are coming down the pipe. We’re still trying to figure out what’s in Dodd-Frank and how that will impact us. We’re also ‘supposed’ to still be in compliance with CRA standards, but the government has taken a break from enforcing that right now, but is that forever or are they going to come back and say we need to be in CRA compliance? Uncertainty is killing every bank.” . . Then, you said, “Regime uncertainty is certainly a huge factor, especially for regional banks, which were among the healthier banks after the collapse.”

I am a lawyer with a specialized practice in banking and financial institutions law. Your friend’s comments are exactly right and are true for all banks — whether multinational, regional, super-community bank, or community bank size.

Ubiquitous November 16, 2011 at 5:57 pm

far more obvious reasons for weak demand that we have

By “weak demand” you mean “weak consumer spending” and Don has already posted data showing that consumer spending is greater now than it was in 2007.

And, no, investment is not a kind of demand. Ergo, weak investment does not translate as a certain kind of weak demand. You can’t take “investment” and “consumer spending” and then lump them together and call the whole undifferentiated thing “aggregate demand.” If you think that, you know very little of the Austrian approach to economics.

It’s idiotic to speak of “investment demand”. That’s the real source of your confusion.

To say that investment is just a different sort of demand from consumer spending would be like saying that the future is just a different sort of present from the present; “after all,” a Keynesian might say, “they’re both time periods. Let’s just lump the two together and call it ‘aggregate time’.” Present and future are categorically different things in the Austrian view, and have much to do with the Austrian view of a consumer good vs. a capital good. You need to start from the very beginning and read Menger’s “Principles of Economics.”

Also, you’ll understand a lot more by looking at these downloadable PowerPoint presentations comparing Austrian and Keynesian approaches to capital theory. Among other things, they will reintroduce you to the important concept of the Production-Possibility Frontier, which you seem confused about.

Daniel Kuehn November 17, 2011 at 8:38 am

re: “And, no, investment is not a kind of demand.”

This is completely wrong.

I’m very familiar with Garrison and have read and reread his books, articles, and powerpoints. ABCT has some very important capital structure dynamics that ought to be incorporated into mainstream economics, and if they ever are incorporated into mainstream economics we’ll probably have Roger Garrison to thank for that. Thanks anyway for the links.

Jon Murphy November 17, 2011 at 8:43 am

Right, Dan. Investment is a demand supplied by loanable funds.

Ubiquitous November 17, 2011 at 1:05 pm

This is completely wrong.

In that case, you believe that “the present” and “the future” are the same thing, subsumable under a category called “aggregate time period.” You’ll never get anywhere with that, just as Keynes got nowhere with subsuming “investing” and “consuming” under the single category of “aggregate demand.”

“Investing” is not demand. It’s a deferral of demand until some point in the future. “Investing” is future-oriented; “consuming” is present-oriented. “Demand” has reference to the latter, not the former.

It’s obvious to many of us, DK, that you don’t grasp the essential importance of time in Austrian economics, or the central idea of a period of production.

Happy to hear that you’re “acquainted” with Garrison. That’s not enough. You have to understand him. Start with the Production-Possibility Frontier.

Ubiquitous November 17, 2011 at 1:10 pm

@Jon Murphy: Investment is a demand supplied by loanable funds.

Fine. But loanable funds come into existence through saving, which is a deferral of demand on the part of those doing the saving; i.e., an abstention from present consumption.

Saving comes from a lowered time preference; a lessening of importance of the present compared to the future.

vikingvista November 17, 2011 at 1:19 pm


That’s where they *would* come from if market forces were allowed to regulate it. Where they actually come from is central bank fiat, which is to say, indiscriminately from the pockets of everyone who uses dollars, whether they like it or not, and regardless of their time preferences.

kyle8 November 16, 2011 at 2:57 pm

If the key to Keynsianism is the behavior of investment then why do you discount the Ricardian equivalence?

It seems to me that if we are talking about a low level of government borrowing then perhaps there is no noticeable difference in investors actions or expectations.

However, when the debt is at a record high level, and has grown in an alarming manner, and we also have the specter of other nations who have defaulted from their huge debt. It seems to me that under those circumstances that investors will indeed change their behavior and any government spending will have a negative rather than positive effect on investment.

I think that under our current situation a climate of fear prevails and the Ricardian Equivalence is indeed valid.

Daniel Kuehn November 16, 2011 at 12:48 pm

Perhaps this would help.

Imagine if I wrote up a post titled “The Problem Ain’t Government”, and then in that post I wrote the sentence “The problem isn’t that financial sector regulators distorted market incentives; the problem is that the CRA and HUD encouraged irresponsible home buying”, and opined that “libertarian dogma” [Don's word from the original post] kept pushing this idea that government was the problem despite a ton of evidence that it was really the CRA and HUD.

I submit that if I had written something like that:

1. Any one of you would be entitled to point out the flaw in my logic.

2. It would be incumbent on me as a blogger to understand what was wrong with that jumble of claims, and

3. That even if I thought it might require some exegesis to sort out the libertarians who blame regulators from the libertarians who blame HUD, I really shouldn’t claim that (1.) the ideas behind these claims are dogma, or (2.) I’ve offered any evidence at all that “the problem ain’t government”.

Sam Grove November 16, 2011 at 4:18 pm

this idea that government was the problem despite a ton of evidence that it was really the CRA and HUD.

Was that intended to be lousy logic?

Ghengis Khak November 17, 2011 at 1:19 am

The only sense I can make of GP is if you make “government” == “government regulation”

Daniel Kuehn November 17, 2011 at 8:39 am

Yes it was deliberately lousy logic written up to be analagous to Don’s lousy logic that proof against the claim that inadequate demand is the problem is that investment demand is weak.

SaulOhio November 16, 2011 at 1:22 pm

Some Keynesians argue that the problem is that consumer spending hasn’t recovered to the level it would be at now if the original rate of spending growth had continued. I have seen a graph of consumer spending showing the Great Recession as a dip in spending, and the “recovery” shows growth resuming at the original rate after the dip. They say that for the economy to fully recover, the growth in spending would have to accellerate enough to put us on the original curve.

Is this a new idea, made up to explain away the absence of full recovery, or was it an original part of Keynesian economics?

mp2c November 16, 2011 at 2:01 pm

Using IMF data from 07-10 and projecting the data (from a very steady trend) through q2 2011, the us population is up about 3.4%. So personal consumption being up only 1% indicates to me insufficient demand.

Randy November 16, 2011 at 2:25 pm

From Wiki, Stardate 2300; John Maynard Keynes: 20th Century (AD) political philosopher whose primary contribution to the field was the idea that political organizations should focus on the short run over the long run. Practical politicians, not unexpectedly, took to this advice like fish to water.

kyle8 November 16, 2011 at 3:00 pm

In the long run, we are all poor.

Because of the government debt which we cannot pay.

Ryan Vann November 16, 2011 at 3:09 pm

I always thought the I in IS-LM stood for investment. I think DK might be correct here, at least in part; Keynesians do have investment in mind somewhere in their models.

Ryan Vann November 16, 2011 at 3:11 pm

I know it’s not the feng shui thing to say, but DK has a valid point here.

Methinks1776 November 16, 2011 at 7:46 pm

When is a valid point not feng shui?

Daniel Kuehn November 17, 2011 at 10:01 am

Even if one doesn’t agree with me on Keynesians and what they’ve been saying for decades, everyone should be able to agree how bizarre it is that Don writes the sentence: “The problem isn’t that consumers aren’t spending; it’s that businesses aren’t investing.” in a post titled ““The Source of the Problem Ain’t Inadequate Demand”.

Ubiquitous November 17, 2011 at 12:55 pm

Don is right. You are wrong.

“Demand” is not an aggregate that includes both business investing and consumer spending.

“Investing” and “consuming” are two different things and are not subsumed under the same category.

That’s the source of Keynes’s confusion; that’s the source of your confusion.

Your homework assignment is to review the concept of the Production-Possibility Frontier. See the PowerPoint presentations by Garrison I linked to earlier. They compare Austrian capital theory to Keynesian, and they’re very well done.

LowcountryJoe November 17, 2011 at 6:44 am

The more I think about macro economists, the more it depresses me that those with the brains to study the discipline — and get into positions to be taken seriously by policy-makers — cannot seem to see the obvious consequences of playing economic whack-a-mole through their bullshit policy design gimmicks and fettering with incentives.

The marxo economists on Left ought to get together with their ideological colleagues from the biological sciences and have frank discussions about ecosystems and the ideas of Darwin before proceeding any longer with this whack-a-mole game.

gamut November 17, 2011 at 9:28 am

I think the original post is overly generous to Daniel. Daniel, no offence, you seem like a really reasoned guy, but that defence if just about as hollow as it could possibly get. One does not need to resort to generalities, as Don has, to appreciate the fact that 100% of the justification of Keynsian intervention over the past few years has been precisely to augment consumption at the cost of investment and savings. Indeed, it is the fallacious argument that the latter has supplanted the former that has been the bedrock of support to the spend-free movements the world over. The stimulus was supposed to go directly into spending, along with unemployment insurance extensions; “best to give it to the unfortunate who will most quickly spend it!”, it has most often been said.

I can name not one, but several nobel laureates, whom I’m sure you would consider ‘serious’ Keynians, making this very argument — ridiculous as both past reason and present date have made it appear. I could post some article links, but I’m sure you can find them on your own just as soon as you appreciate how ridiculous it is to claim that Keysians don’t really mean THAT spending, they mean the other kind, that’s actually called “saving” by the Austrians.

John Papola November 19, 2011 at 9:25 am

I guess “cash for clunkers” was meant to spark “investment spending” then? What about all the talk of money going to the unemployed having a higher so-called “multiplier” because they need to spend it all (on consumption)? What about claim by Paul Krugman that tax cuts for the rich are bad for a slumping economy because the rich won’t spend as much as the poor and middle class. And, in what economic sense, is war spending “investment”?

Daniel’s defense of keynesianism on these “it’s all about investment” grounds run afoul of seemingly every actual keynesian-inspired policy AND many claims made by the most prominent Keynesians themselves. The very notion of “investment” here is silly.

“Investment” isn’t about “spending”. This is a nonsense way to think about the concept. “Investment” is about attempts to increase productivity. The “spending” is just a nominal veil fluttering over the commitment and risk of resources in the efforts. Consider the R&D budget of Microsoft vs Apple and their relative gains in production and income over the past decade. Microsoft “spent” WAY more. Apple produced more and saw their revenues and profits grow far more as evidence of this increase.

Investment inherently involves risk. Consumption (assuming safety isn’t a concern) does not. That DOES make investment more volatile than consumption. Keynes is right about that… and so is everyone else that thinks about it for more than 30 seconds. But to take this basic notion and then map it into ex-post accounting where consumption and investment are merely “spending” is missing the core idea of what they activities are. Worse still, is the idea that they are additive in the short run rather than in conflict due to the source of funding for investment coming from savings and thus reduced consumption.

Keynesiansism insofar as it is different from monetary equilibrium theory is wrong. If people are freaked out and hoard cash, the monetary system should increase the supply of cash so that their activity doesn’t produce deflation. A central bank will do a sloppy job at that, but that is what it should try to do. Saying that an increased demand for cash should be met by paying political cronies to dig ditches and that “it doesn’t matter” because the money will flow through the system and lift so-called “velocity” is nonsense.

If macroeconomics was a progressive discipline instead of one doomed to debate the dark ages, Keynesianism would have vanished in 1947 after it was clear that there post-WWII depression never happened and the debate would now center around NGDP-stability via monetary policy from a central bank versus free banking without a central bank.

Greg G November 19, 2011 at 9:47 am


I am sure you have read a lot more economics than I have. Can you show me anywhere that Keynes himself said we should expect a post WWII depression? I have been unable to find any such prediction by Keynes and we have it directly from Hayek that Keynes was shifting his concern to inflation after the war.

Daniel Kuehn November 19, 2011 at 10:27 am

Keynes, Beveridge, Kaldor, Hansen, the CED, the Brookings Institution, and presumably many others said that there would not be a post-war depression and they cited the abundantly obvious reasons: everything indicated private demand would be very strong.

Samuelson disagreed. In the chapter of Harris’s book where he disagreed (which everyone quotes from but apparently doesn’t read in its entirety), Samuelson went out of his way to point out that he was swimming against the tide – that all his compatriots thought there would not be a deep depression. Samuelson was the odd man out and Samuelson was wrong.

This myth really needs to die.

John Papola November 19, 2011 at 5:44 pm

Samuelson… and Alvin Hansen.

But I guess they were both minor players in the popularization of Keynesianism.

Daniel Kuehn November 20, 2011 at 8:47 am

John you need to read the whole Hansen chapter in the Harris volume. He does talk about slowly winding down military expenditures, but more for Arnold Kling/PSST reasons about transitioning men and plants to peace-time activities. He rejects the idea that there would be insufficient demand – something that Samuelson does say in the next chapter.

A partial sentence from Hansen quoted in a Cato publication isn’t going to cut it.

Daniel Kuehn November 19, 2011 at 10:23 am

re: ““Investment” isn’t about “spending”. This is a nonsense way to think about the concept. “Investment” is about attempts to increase productivity”

Investment is spending to increase productivity in anticipation of other people wanting to buy from you (i.e. – spend) in the future.

That’s about as simple a definition of “investment” that you could come up with. Of course it’s about increasing productivity – and it’s all about spending as well. How can you possibly say it isn’t? What the hell do you think investors do – “wish upon a star” for increased productivity?

re: “The “spending” is just a nominal veil fluttering over the commitment and risk of resources in the efforts.”

The commitment and risk of resources can also be referred to as “the expenditure and risk of resources”. You’re grasping at straws here, John, and you’re completely misappropriating the discussion of nominal expenditures as a “veil”.

re: “Keynesianism would have vanished in 1947 after it was clear that there[sic] post-WWII depression never happened”

You need to go back to the source material and stop believing everything you read on blogs.

Methinks1776 November 19, 2011 at 10:50 am

I think this has become an argument about semantics.

In finance (the language of which is accounting), we differentiate between spending (expenditure) and investment (CAPEX). The former is not expected to yield a return beyond the current time period, it’s just the cost of doing business, the latter is an expenditure on an asset that is meant to provide a return over many time periods. The former is thought of as business consumption and the latter as investment.

Both require the business to spend – either to buy paper clips or labour (an uncapitalized expense) or to buy capital equipment to produce whatever product the business produces.

I don’t think Danny K is implying that investment spending is anything like consumption, so I don’t see the problem with calling it “spending”.

Daniel Kuehn November 19, 2011 at 10:56 am

Macroeconomists do the same thing insofar as what normal people call “investing” (ie – buying certain securities) is referred to as “saving”.

But John is talking macroeconomics, not personal finance or accounting. He has some very deep misconceptions about Keynesian claims that he clings tenaciously to.

Methinks1776 November 19, 2011 at 10:59 am

Macro vs. Macro? I don’t understand.

Daniel Kuehn November 19, 2011 at 11:47 am

Not sure what you mean. I’m saying John is talking about macroeconomic issues and you’re right we should use macroeconomic understandings of these terms. And John does a bad job at explaining/understanding Keynesianism. As you point out – in other lingos this idea about investment as spending does not make sense. But John is talking macroeconomic lingo, and so he’s wrong to scoff at this.

Methinks1776 November 19, 2011 at 1:14 pm


In other lingos, Investment and spending are different. However, even in my world (finance), we still understand that CAPEX is an acronym for “Captial Expenditure“.

John Papola November 19, 2011 at 7:52 pm

Is it or is it not the claim of Keynesian economists that government spending can and should “replace” falls in private investment spending in order to maintain aggregate demand?

This claim assumes one of two things:

1. Government spending is just as productive as private decentralized investment spending.


2. It doesn’t matter if government spending is productive or not so long as it maintains AD. It’s a “free lunch” or, in the extreme version, even wars and tsunamis can be stimulus.

Now, I oppose the assumption of #1 on socialist calculation grounds. There’s a reason we don’t want the state owning the means of production and those reasons are in part that centrally-planning resource allocation is more wasteful.

#2, which has been asserted repeated throughout this crisis from across the high-level keynesian spectrum, just doesn’t make a damn bit of sense to me. I understand the reasoning when looking at the aggregates, but I don’t see that as economics. Cash for clunkers isn’t good for the economy or employment. Neither is war or tsunamis. Krugman and Summers are wrong. It ALWAYS matters where that money gets spent. Waste makes us poorer. So I reject #2 as a methodological error in Keynesianism that is the product of over-aggregated analysis.

#1 could theoretically work… if socialism worked. #2 is nonsense.

Once we turn to the other aspects of keynesianism, such as “liquidity traps” and “sticky wages”, each can theoretically be dealt with via monetary equilibrium policy changes (or, better, a free banking system). At no point does handing the government the keys to dig ditches with borrowed cash suddenly make sense.

But hey, if I’m STILL missing something, I’d love to hear it explained.

John Papola November 19, 2011 at 5:58 pm

My point is not that investment isn’t “spending”, Daniel. My point is that the nominal LEVEL of investment spending isn’t what matters for economic growth, hence my reference to MS vs. Apple R&D productivity.

But, again, as so many keynesians at the highest levels conflate the impacts of consumption and investment by virtue of them nothing being “spending”. I guess Krugman and Blinder and Stiglitz don’t appreciate Keynes the way you do. That could be.

This really does boil right back down to the problem of aggregation and ex-post accounting style thinking that’s embedded in the keynesian approach. It’s all about the nominal, not the real. People buying groceries is treated with equal weight as a firm purchasing more productive robotics because both are “spending”. It is in this sense that I call the focus on “spending” a “veil”. Perhaps that a clunky way to make the point. Fine.

Yes, agreed, all commercial transactions in a monetary economy are spending. That doesn’t make them equal in terms of impact on productive capacity or growth. Yet this is exactly the way Keynesians talk about spending ALL THE TIME. Such conflations are throughout that NPR piece and the writing from prominent Keynesians throughout this recession.

Despite your claims, Daniel, actual keynesianism is NOT merely a freidmanite helicopter drop. Digging ditches or stuffing the pockets of solar panel cronies CONSUMES REAL RESOURCES. Expanding the money supply to meet demand doesn’t.

To the extent that Say’s law fails to take into account cash hoarding, monetary equilibrium theory and free banking theory provide an answer. Keynesian “fiscal stimulus” does not. And I still have yet to see a good answer to my criticism of the socialist calculation problems with keynesian government spending.

Daniel Kuehn November 20, 2011 at 8:49 am

re: “And I still have yet to see a good answer to my criticism of the socialist calculation problems with keynesian government spending.”

I still have yet to see a valid counter-argument from you to the answer I gave you on Henderson’s posts months ago.

John Papola November 19, 2011 at 9:26 am

PS… isn’t it hilarious that NPR used Fear the Boom and Bust as their story thread for this exhibition of KEYNES! Nobody can say we got it wrong.

Methinks1776 November 19, 2011 at 10:13 am

John, did you intend to link to the NPR story?

Daniel Kuehn November 19, 2011 at 10:17 am

re: “Nobody can say we got it wrong.”

Lots of people have, John.

NPR uses it because it’s popular. That should be consolation enough for you – no need to make up things like “nobody can say we got it wrong” :)

I liked the video a lot too, and get a glow of recognition and interest when NPR uses it as a hook, but I wouldn’t go as far as saying that you got it right.

Greg G November 19, 2011 at 3:21 pm


Thanks for the explanation above on post WWII.


I loved the video and thought it was very fair but I notice it did not contain the claim that Keynes predicted a post WWII depression.

Daniel Kuehn November 20, 2011 at 8:58 am

There’s one specific example “all your friends cried disaster”. No. Not all your friends. One important “friend”. All of the rest of “his friends” were saying that there would be a boomlet after the war and we may need to control inflation, and that pent up demand from the war itself would keep the economy strong (this was NOT an argument developed by Paul Krugman in 2008, people).

So there’s one major issue with it. Students watching this video walk away thinking that Keynes thought the economy would be weak and recessionary without government spending. And that doesn’t just come across in that one scene.

John Papola November 19, 2011 at 5:45 pm

So where did we get Keynes wrong in Fear the Boom and Bust, Daniel?

John Papola November 19, 2011 at 7:06 pm

Or Fight of the Century for that matter. Our critics of that piece were criticizing the words that came out of HAYEK’S mouth, which is really weird. I don’t think we’ve misrepresented Keynes in any of our EconStories videos. But please, Daniel, help us do better.

Daniel Kuehn November 19, 2011 at 11:15 pm

John, you and I have had this conversation a lot and it typically ends with you accusing me of not answering your questions after I’ve spilled a lot of ink doing just that. All the concerns about how you and Russ read Keynes are out there for you.

Greg G November 20, 2011 at 8:17 am


I agree with most of the criticisms you have about how Keynes is represented here at the cafe. But I am not at all clear about how you think the rap videos were unfair. It seems to me that they were a lot more fair and restrained than regular cafe conversation about Keynes.

Can you tell me where to find your more specific criticisms of the rap videos?

Daniel Kuehn November 20, 2011 at 8:53 am

Greg G -
Search for the videos on my blog and there’s also a long conversation between John and I on one of David Henderson’s post. I’m sure I’ve mentioned stuff on Don and Russ’s posts announcing each of the videos here, and I was also involved in a wider discussion about central planning and Keynesianism in response to the second video which involved a lot of blogs.

Daniel Kuehn November 20, 2011 at 9:00 am

When Hayek makes a claim and Keynes essentially concedes the point you are making an assertion about Keynes. That’s certainly how your viewers interpreted it.

Out of curiosity, though, what words from Hayek’s mouth do you – John Papola – consider wrong. Simply inaccurate descriptions of Keynes. I’m curious.

John Papola November 22, 2011 at 12:29 am

Keynes does NOT concede the point to Hayek about central planning in the lyric. He dodges it, saying that “my solution is simple and easy to handle. It’s spending that matters, why’s that such a scandal?”

I defended the Hayek line, as well as my own problem with Keynesianism along socialist calculation lines here:

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