Quotation of the Day…

by Don Boudreaux on December 7, 2011

in Hubris and humility, State of Macro

… is from page 241 of Elizabeth S. Johnson’s and Harry G. Johnson’s 1978 book The Shadow of Keynes:

Keynesian ideas on economic policy appear increasingly with the passage of history to be severely and dangerously limited in relevance by the presuppositions about the economic and social world implicit in Keynes’s position as a successful member of the Cambridge academic community and the British establishment.  Keynes’s theory of liquidity preference was as ‘a College Bursar’s theory of interest’; more broadly, it was a stock-market speculator’s theory of asset prices and price movements.  But, in addition, Keynes’s theory of wages and employment was a college resident’s theory of labour and industrial work, summarizable in the view that to keep porters happy one should not pay them more than the competitive wage, but should provide playing fields, pensions, and security of employment.  And his theory of entrepreneurship was that of an English academic, used to seeing the worthy, games-loving souls but inferior minds among his pupils going off year by year to staff British industry, where their success would depend on ‘animal spirits’ or British grit but in any case deserved only a modest recompense in hard cash and social prestige.

Be Sociable, Share!

Comments

comments

34 comments    Share Share    Print    Email

{ 34 comments }

Daniel Kuehn December 7, 2011 at 8:15 am

I have to say, Don, a lot of these quotes that you find laudable make me lower my opinion of the authors (sometimes authors I previously respected) that you intend to highlight for praise.

A college bursar’s theory of interest??? You know how I explain liquidity preference to my students? I ask them to think about how much of their often minimum wage job earnings they decide to put into a checking account vs. a savings account. Then they very easily understand why interest is not a reward for abstaining from consumption.

A speculators theory of asset prices??? Come on, Don. Vernon Smith’s own experiments with bubbles show that the beauty contest effect is real. Those are students in those experiments (I did one at GMU several years ago), not speculators.

I’m not even sure what to make of the last half of the paragraph, which is dripping with class warfare rhetoric and has little discernible Keynesian insights on wages in it.

As for entrepreneurship, Keynes discussed at great length how the purpose of entrepreneurs was to defeat “the dark forces of time and ignorance that envelope our future”. The whole concern he had with the rentier aspect of the returns to investment was precisely the distortion it introduced to the skilled work of a true entrepreneur. This quote treats Keynes as if he was dismissive of entrepreneurship as some animalistic instinct for inferior minds to engage in.

Nobody reading this post should proceed under the misconception that this has anything to do with the thought of John Maynard Keynes.

The blogosphere went ballistic the other day when Krugman noted something that I thought everyone agreed on: Hayek didn’t really influence macroeconomics after the 1930s. Yet today I guarantee you this sarcastic, content-less smear is going to largely uncontested.

El Diablo December 7, 2011 at 8:25 am

And yet, no one reads your blog, Daniel.

Jon Murphy December 7, 2011 at 8:36 am

I read it. It’s pretty good.

Greg G December 7, 2011 at 8:42 am

I read it too. But I don’t know how many others do. To claim I did know would be…..what is it?…… Oh yeah…..the pretense of knowledge.

Jon Murphy December 7, 2011 at 8:46 am

Sorry, El Diablo, but creativity point goes to Greg here.

Daniel Kuehn December 7, 2011 at 8:53 am

So while I like the attention to my blog, am I just talking nonsenses on Don’s post?

The idea that this is some aristocratic theory that has nothing to do with regular experience just strikes me as absurd.

And notice how Don picks up smears of convenience. One minute he’s criticizing Keynesianism precisely because it’s allegedly so pedestrian which is why it appeals to the “man on the street”, and then the next minute Keynesianism is highly aristocratic and an obvious fallacy from the perspective of the man on the street.

I don’t know about the rest of you, but I’m getting whiplash.

Jon Murphy December 7, 2011 at 9:02 am

I think, Dan, that the interpretation of the quote differs from you to me. I read the quote more as a bias piece: Keynes views the world from the safety of tenure at Cambridge, through the eyes of his stock trades and, because of that, his views on economics are shaped. His ideas, while fascinating in an academic sense, leave much to be desired in the real world. Imagine if we tried to implement Plato’s Republic; it’s a fun philosophical discussion, but doesn’t really mean anything/wouldn’t work in the real world. I believe that’s the point the author’s are making. Keynes has a lot of fun academic arguments for solutions, but they aren’t applicable in real life aside from populism (of course, one could make the same argument for Austrian economics and would be totally justified in doing so).

That’s just how I read it.

Daniel Kuehn December 7, 2011 at 9:08 am

Maybe you could clarify what you think is hard to think about in the real world (or are you saying that’s their argument – I agree that’s their argument). The whole appeal of Keynes is that when you bring him to the real world it makes a lot more sense than a lot of what came before.

Jon Murphy December 7, 2011 at 9:19 am

I’m just saying that’s their argument. My own feelings on Keynes are different.

El Diablo December 7, 2011 at 7:53 pm

Greg G, why stop pretending at knowledge now?

GAAPrulesIFRSdrools December 7, 2011 at 9:13 am

I looked at it. Its the predictable ruminations of somebody whose pursuit of an economics degree is really meant to add new arrows to his “public policy” quiver and who needs to expand his horizons beyond the academy and his youth.

Daniel Kuehn December 7, 2011 at 9:25 am

Ya, pretty much.

Except I like to think I’m not entirely predictable.

Greg G December 7, 2011 at 9:26 am

Careful Jon. Any more hints of sympathy to Keynes and the cafe immune system may initiate the rejection process.

Jon Murphy December 7, 2011 at 9:30 am

Heh don’t worry Greg. I’ll be around for a while. I respect Keynes as an economist and intellectual. I may disagree with his theories, but I can understand (some of) the logic behind them and I can respect his accomplishments.

El Diablo December 7, 2011 at 7:55 pm

Exactly so, GAAP Rules!

El Diablo December 7, 2011 at 7:47 pm

That’s one.

El Diablo December 7, 2011 at 7:52 pm

Make it two. Okay, Daniel a few people read your blog. I stand corrected. Without Cafe Hayek, however, I don’t think either Jon or Greg would know that you existed. I think that you are rude to both our hosts just because you don’t like their point of view. It would be okay if you made good arguments, but you don’t. And, it seems personal, rather than a difference of opinion.

Greg G December 7, 2011 at 7:59 pm

LOL disingenuous conclusory statement GW LOL

El Diablo December 7, 2011 at 8:32 pm

Greg G, keep working on your reading comprehension skills. An opinion can be neither disingenuous nor conclusory. Arguments meant to persuade, however, can be disingenuous and conclusory. And, you know all about those.

Greg G December 7, 2011 at 8:36 pm

Not meant to persuade, just meant to show how transparent the change of identity was.

El Diablo December 7, 2011 at 8:55 pm

Keep working on your reading comprehension skills (you misunderstood my last comment) and also your sleuthing skills.

Daniel Kuehn December 8, 2011 at 9:19 am

re: “I think that you are rude to both our hosts just because you don’t like their point of view.”

Name a single rude thing I’ve said to either of them.

I disagree with them often and I don’t use kid gloves when I disagree with them, it’s true. But I’ve never been rude to my knowledge, and if I have been rude I certainly didn’t intend it.

But you’re the one making the accusations here – what’s the evidence?

Sam Grove December 7, 2011 at 4:20 pm

You know how I explain liquidity preference to my students? I ask them to think about how much of their often minimum wage job earnings they decide to put into a checking account vs. a savings account. Then they very easily understand why interest is not a reward for abstaining from consumption.

You might ask how many of them think the government will take care of them when they get old.

Daniel Kuehn December 8, 2011 at 9:20 am

That doesn’t seem relevant to a discussion of interest rate determination. Time is precious – we have a lot to talk about.

Sam Grove December 8, 2011 at 3:42 pm

It seems relevant to why people exhibit time preference.

If I believe the government is going to take care of my retirement, why should I worry about savings?

Seth December 7, 2011 at 1:02 pm

“Then they very easily understand why interest is not a reward for abstaining from consumption.”

Would you mind elaborating on that?

GAAPrulesIFRSdrools December 7, 2011 at 1:12 pm

Its not a reward for ABSTAINING from consumption, but postponing it, and going long on a risk that you will never consume, due to incapacity from financial, morbidity or mortality risk.

Seth December 7, 2011 at 1:23 pm

I’m not sure who believes interest is a reward for ‘abstaining’ from consumption.

Sam Grove December 7, 2011 at 4:18 pm

Maybe the Johnson’s were channeling their inner leftists.

Kuehn reader December 8, 2011 at 1:07 pm

I do read, as well. I like the content, although I don’t know how many people actually read it.

Oh wait…

W.E. Heasley December 7, 2011 at 8:58 am

“Keynesian ideas on economic policy appear increasingly with the passage of history to be severely and dangerously limited in relevance by the presuppositions about the economic and social world implicit in Keynes’s position as a successful member of the Cambridge academic community and the British establishment.” – Elizabeth S. Johnson and Harry G. Johnson

-Or-

“For policy, the central fact is that Keynesian policy recommendations have no sounder basis, in a scientific sense, than recommendations of non-Keynesian economists or, for that matter, none economists“. After Keynesian Macroeconomics, Robert E. Lucas and Thomas J. Sargent, 1978, page 57

http://www.bos.frb.org/economic/conf/conf19/conf19d.pdf

Bill Woolsey December 7, 2011 at 9:05 am

“You know how I explain liquidity preference to my students? I ask them to think about how much of their often minimum wage job earnings they decide to put into a checking account vs. a savings account. Then they very easily understand why interest is not a reward for abstaining from consumption.”

Just because interest also _can_ impact the demand to hold money doesn’t imply that it isn’t a reward for abstaining from consumption as well.

Since consumption is negatively related to interest rates as best we can tell, and reducing consumption now certainly allows for increased consumption later if real interest rates are positive, your claims to your students are wrong.

Also, if your checking account also pays interest, then any trade off between saving accounts and checking accounts has to do with the difference between two interest rates. While some kind of “liquidity preference” might well play a role in explaining that difference (as well as different costs in providing the two types of deposits,) that is hardly an explanation of interest rates.

For example, suppose “the” interest rate rises. The interest rate on ‘savings accounts” and the interest rate on checking accounts rise. What does this do to the demand to hold money?

There are lots of interest rates. Which one is the reward for abstaining from consumption? All of them. But more is needed to explain why there are a variety of interets rates and how they can move apart or together.

And, by the way, since this opportunity cost story about the interest elasticity for the demand for money comes from Tobin, (though Marshall mentioned it in passing,) what does this have to do with bond speculators holding money to avoid capital loss?

In my view, given certain monetary regimes, interest rates impact monetary conditions and nominal expenditure. Ignoring this effect (which is what Marshall did after mentioning it,) is not terribly wise.

But that doesn’t make Keynes account of the relationship much of an improvement. This is expecially true when these short run, institutionally contingent roles of the interest rate are allowed to replace the role of the interest rate as a price that allows for intertemporal coordination–including intertemporal consumption.

In other words, that interest rates depend on liquidity preference and are not a reward for abstaining from consumption is _bad_ economics. That given certain institutional arrangements, monetary disequilibrium can disrupt credit markets and push interest rates away from the levels needed to coordinate saving and investment is sound economics.

Daniel Kuehn December 7, 2011 at 9:11 am

Oh, sure. Savings is a function of demand for liquidity and demand for future consumption, both are a function of the interest rate, and certainly we’re going to see a relationship there. I don’t think a pure liquidity preference theory of the interest makes sense. But when students are first introduced to it (because they’ve been using the supply and demand for savings to talk about the interest rate), it’s not hard at all to illustrate to them why that’s not the whole story. This is not some college bursar’s theory we’re dealing with.

Max Power December 7, 2011 at 4:07 pm

Banks (and the accounts therein) are constructs of the state. There’s little difference between a checking account that is accessed easily and directly to pay for stuff and its attached savings account that can be emptied exactly as easily, can be used to back up checking overdrafts, and pays interest rates like this
http://www.money-rates.com/savings.htm
It’s all academic storytelling.
Luckily for your students, they’ll be state shills and do not need to learn anything real.

Previous post:

Next post: