Monthly Archives: December 2012

Krugman’s intro to the General Theory

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This is from Paul Krugman’s introduction to The General Theory:

Stripped down, the conclusions of The General Theory might be expressed as four bullet points:

• Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment

• The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully

• Government policies to increase demand, by contrast, can reduce unemployment quickly

• Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach

To a modern practitioner of economic policy, none of this – except, possibly, the last point – sounds startling or even especially controversial. But these ideas weren’t just radical when Keynes proposed them; they were very nearly unthinkable. And the great achievement of The General Theory was precisely to make them thinkable.

There it is. It could not be put more perfectly than that. And the very first point is precisely what all pre-Keynesian not only denied, but described as utterly fallacious. This is Say’s Law which is as integral to modern economic theory as it was anathema to those who came before. More from Krugman:

[Keynes] quickly shows that the conventional view that wage cuts were the route to full employment made no sense given the realities of the time. . . .

Read Keynes’s speculations on the virtues of mercantilism [ie protectionism] and the vanishing need for thrift. . . .

The real classical model, as Keynes described it, was something much harder to fix. It was, essentially, a model of a barter economy, in which money and nominal prices don’t matter, with a monetary theory of the price level appended in a non-essential way, like a veneer on a tabletop. It was a model in which Say’s Law applied: supply automatically creates its own demand, because income must be spent. And it was a model in which the interest rate was purely a matter of the supply and demand for funds, with no possible role for money or monetary policy. It was, as I said, a model in which ideas we now take for granted were literally unthinkable. . . .

Keynes confronts naïve beliefs about how a fall in wages can increase employment, beliefs that were prevalent among economists when he wrote, but play no role in the model we now call ‘classical.’ . . .

The crucial innovation in The General Theory isn’t, as a modern macroeconomist tends to think, the idea that nominal wages are sticky. It’s the demolition of Say’s Law and the classical theory of the interest rate in Book IV, ‘The inducement to invest.’ One measure of how hard it was for Keynes to divest himself of Say’s Law is that to this day some people deny what Keynes realized – that the ‘law’ is, at best, a useless tautology when individuals have the option of accumulating money rather than purchasing real goods and services. Another measure of Keynes’s achievement may be hard to appreciate unless you’ve tried to write a macroeconomics textbook: how do you explain to students how the central bank can reduce the interest rate by increasing the money supply, even though the interest rate is the price at which the supply of loans is equal to the demand? It’s not easy to explain even when you know the answer; think how much harder it was for Keynes to arrive at the right answer in the first place. . . .

But the classical model wasn’t the only thing Keynes had to escape from. He also had to break free of the business cycle theory of the day.

There wasn’t, of course, a fully-worked out theory of recessions and recoveries. But it’s instructive to compare The General Theory with Gottfried Haberler’s Prosperity and Depression3, written at roughly the same time, which was a League of Nations-sponsored attempt to systematize and synthesize what the economists of the time had to say about the subject. What’s striking about Haberler’s book, from a modern perspective, is that he was trying to answer the wrong question. Like most macroeconomic theorists before Keynes, Haberler believed that the crucial thing was to explain the economy’s dynamics, to explain why booms are followed by busts, rather than to explain how mass unemployment is possible in the first place. And Harberler’s book, like much business cycle writing at the time, seems more preoccupied with the excesses of the boom that with the mechanics of the bust. Although Keynes speculated about the causes of the business cycle in Chapter 22 of The General Theory, those speculations were peripheral to his argument. Instead, Keynes saw it as his job to explain why the economy sometimes operates far below full employment. That is, The General Theory for the most part offers a static model, not a dynamic model – a picture of an economy stuck in depression, not a story about how it got there. So Keynes actually chose to answer a more limited question than most people writing about business cycles at the time. . . .

Rather than getting bogged down in an attempt to explain the dynamics of the business cycle – a subject that remains contentious to this day – Keynes focused on a question that could be answered. And that was also the question that most needed an answer: given that overall demand is depressed – never mind why – how can we create more employment?

“Love today has become a power struggle”

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This is apparently news:

Here’s what we know: Females, in general, are nurturing and relational beings. They like to gather and nest and take care of people. They like to commiserate with other females – a lot. That’s why girls can talk for hours on end. It’s why more women stay home with their children than men. It’s why the teaching and caregiving professions are still heavily female. Not every single woman in the world falls into this category, but that doesn’t make the generalization any less true.

Males, on the other hand – in general – are loners. They’re content to mill about in their man caves. They like to hunt. They like to build things and kill things. If you don’t have a son, this may sound strange. But again, that doesn’t make it untrue – nor does the fact that not every single man in the world is like this. Men also take pride in caring for their families. They can’t carry babies or nurse them, but they can provide for them. So let them.

From an article by Susan Venker in a follow up to an earlier post on The War on Men which dealt with why men were retreating from marriage. I discussed that article here. In the present article, Venker gets to the heart of the matter in ways, that if true, would make anyone thinking of marriage run for the hills:

Love today has become a power struggle, largely because women have been conditioned to keep their guard up – as though men and marriage will swallow them whole. As Sandra Bullock once said to Barbara Walters, ‘I’d always had this feeling that if you got married, it was like the end of who you were.’ That attitude is commonplace, and it’s the direct result of a generation of feminists who told their daughters never to depend on a man. . . .

Surrendering to your femininity means to put down your sword. It’s okay if your guy’s in charge. It’s okay if you don’t drive the car.

In fact, it’s rather liberating.

She has written a book, How to Choose a Husband and Make Peace with Marriage, the research for which has driven the conclusions. But it’s the culture and this is how it is and will be for a long long time whatever common sense anyone tries to intrude into the argument.

The working class and the voting class

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Ann Coulter does the numbers and it is now a demographic battle in the US about who comes and who votes. It wasn’t the young after all who has voted to subvert the America of individual effort and personal responsibility. Ann tells a quite disturbing story:

On closer examination, it turns out that young voters, aged 18-29, overwhelmingly supported Romney. But only the white ones. . . .

What the youth vote shows is not that young people are nitwits who deserve lives of misery and joblessness, as I had previously believed, but that America is hitting the tipping point on our immigration policy.

The youth vote is a snapshot of elections to come if nothing is done to reverse the deluge of unskilled immigrants pouring into the country as a result of Ted Kennedy’s 1965 immigration act. Eighty-five percent of legal immigrants since 1968 have come from the Third World. A majority of them are in need of government assistance.

Whites are 76 percent of the electorate over the age of 30 and only 58 percent of the electorate under 30. Obama won the “youth vote” because it is the knife’s edge of a demographic shift, not because he offered the kids free tuition and contraception.

There is even this, which does seem to show there is a way out, as difficult as it may be:

Nearly 20 percent of black males under 30 voted for Romney, more than three times what McCain got.

It is working and paying taxes that may be the divide that matters. As she points out, it is immigration policy that is in the middle. And it will be the big issue of the future as the US does or does not submerge itself under a flood of migrants from places where no one can even conceivably be employed in a high tech, English speaking nation as the US for the time being now is. This is how she concludes:

Romney got a larger percentage of the white vote than Reagan did in 1980. That’s just not enough anymore.

Ironically, Romney was the first Republican presidential candidate in a long time not conspiring with the elites to make America a dumping ground for the world’s welfare cases. Conservatives who denounced Romney as a ‘RINO’ were the ones doing the bidding of the real establishment: business, which wants cheap labor and couldn’t care less if America ceases to be the land of opportunity that everyone wanted to immigrate to in the first place.

My previous post on Australia becoming a third world country has as the subtext that the parties of the left are actively ruining their countries for political advantage. Most of these people will never pay more in taxes than they take in welfare. But they’re not being brought here to work. They are being brought here to vote.

Alesina paper on austerity

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Alberto Alesina has written another paper on why cutting spending is good for you. Titled “The Design of Fiscal Adjustments” it demonstrates what anyone who understands Say’s Law perfectly well understands, that cuts to public spending lifts an economy rather than depresses it. The abstract, cautiously written of course, but you will get the drift:

This paper offers three results. First, in line with the previous literature we confirm that fiscal adjustment based mostly on the spending side are less likely to be reversed. Second, spending based fiscal adjustments have caused smaller recessions than tax based fiscal adjustment. Finally, certain combinations of policies have made it possible for spending-based fiscal adjustments to be associated with growth in the economy even on impact rather than with a recession. Thus, expansionary fiscal adjustments are possible.

We are turning Australia into a third world country

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age - overcrowding sick and depressed

This was the picture that came with the front page story in The Age today. Here is some of the text:

Mr Ali, a refugee, and his wife Filsan, are among at least 50 Somali families in West Heidelberg facing acute overcrowding. Community leaders say about half of the area’s Somali families are living in sub-standard conditions, as their culture, which prizes large families (the average is four or five children, but many have seven or eight), meets the limits of public housing stock.

A Human Services Department report into public housing in the West Heidelberg area, recently released under freedom of information, found an oversupply of two-bedroom houses, but the wait for a four-bedroom house was more than 15 years in 2009. West Heidelberg housing lawyers now advise clients the delay is at least 20 years. . . .

In West Heidelberg, where 70 per cent of dwellings are public housing, lawyer Megan King said she regularly saw families dealing with severe overcrowding. ‘These families are desperate for any help they can get to move to a larger property,’ said Ms King, a housing rights lawyer at the West Heidelberg Community Legal Service.

I wonder if this is related. From the US:

Fifty-seven percent of Mexican immigrants on welfare

Well, how heartless can these taxpayers be. Look what’s being considered and examined:

Overall, state and federal aid use by immigrant families is much higher than that used by families headed by citizens of the United States.

The large population of immigrants, both legal and illegal in Eastern Washington and even Spokane affects the states budget dramatically.

The approaching fiscal cliff is forcing congress and the current administration to contemplate cuts to services. Welfare use by immigrants, both illegally and legally within the United States, should be thoroughly examined and considered while making cuts.

Markets work

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A discussion about markets and entrepreneurs. This is economics as it ought to be:

Markets work. Market prices provide information about lots of disparate things instantaneously. Market prices tell you to dig deeper for more. Every single activity belies a market. Angel investing has a market, with supply and demand and market prices. When someone tells you that in the midwest they could only raise capital at a $3M pre-money valuation, but on the coasts could do it for $6M-is that a bubble on the coasts? Or is the midwest undervalued? Who’s right and who’s wrong is the answer that everyone wants to know.

The answer is that markets set the price and there isn’t a way to arbitrage between angel markets on coasts. Investments are stuck in probability theory. It’s either x, or 1-x. Once the check is written, there are only two outcomes, success or failure. Since it’s easier to start a business than ever before, it’s no surprise that we are seeing a lot fail.

Each separate market is efficient. Additionally, they each have their own supply and demand curves. More supply in this case means more capital. If demand for that capital stays the same, prices will rise. As prices rise, more demand enters the market and you have what looks like a bubble as long as the supply of capital can keep flowing to meet higher and higher levels of demand.

Self interest, as ever, rules

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I can only think that women are seen by women as different from men. The head of the National Organisation of Women in the US, Terry O’Neill, wants parity of gender in Obama’s cabinet:

I think that if half of the cabinet were women and half of the Supreme Court and half of Congress were women, we would see a lot more policies for expanding education and health care and social services that allow communities to thrive,’ O’Neill explained. ‘We’d see a lot less spending on military weapons systems, and we would also see a lot less of the most powerful, moneyed people not paying their fair share.’

What happened to the best person for the job? Don’t even ask. And yet there is this other side of the story which suggests that women don’t get to the top because they don’t want to.

‘Why Women Still Can’t Have It All,’ a recent, widely discussed Atlantic cover story, should help redirect the conversation to the obvious: it’s the kids. The author, Princeton professor Anne-Marie Slaughter, described leaving ‘work I loved’—being the director of policy planning at the State Department, and the first female one, at that—to spend more time with her troubled teenage son. She had discovered, you see, that running a government agency means that you don’t see your kids much.

Slaughter stumbled onto a truth that many are reluctant to admit: women are less inclined than men to think that power and status are worth the sacrifice of a close relationship with their children. Academics and policymakers in what’s called the “work/family” field believe that things don’t have to be this way. But nothing in the array of work/family policy prescriptions—family leave, child care, antidiscrimination lawsuits, flextime, and getting men to cut their work hours—will lead women to infiltrate the occupational 1 percent. They simply don’t want to.

And the conclusion after a very long article:

Most women will continue to prefer long maternity leave, reduced hours, and part-time and flexible jobs. The end of men? Not in Alphaville.

The world of work is long, hard, exacting, tedious and competitive especially at the top. It wears you down. If there’s a nicer, sweeter, more gentle alternative it is not surprising when someone chooses that alternative instead.

Say’s Law the video

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My book, Say’s Law and the Keynesian Revolution, has been turned into a movie! John Papola, the genius behind the Keynes-Hayek Rap, has now done a movie on Say’s Law, the fundamental principle of the pre-Keynesian theory of the business cycle. Before Keynes, they knew you could have recessions but they also knew that the one thing that could never be the cause of recessions was a deficiency of demand. Too little demand relative to potential supply was a symptom, not a cause. Today all macroeconomics proclaims demand deficiency as the problem itself that must be cured. Therefore we have had one stimulus after another followed by one economic catastrophe after another. In Australia there’s the mining industry and nothing else to drive the economy forward.

To help you understand the video, here are a few bits of background to catch the full flavour of just how beautifully done this is.

John Maynard Keynes introduced the notion of aggregate demand into economic theory. Before he published his General Theory of Employment, Interest and Money in 1936, demand deficiency as a cause of recession was literally and with no exaggeration seen as a fallacy. Today, of course, his macroeconomics is the mainstream and when recessions occur the first thought in everyone’s mind is to restore demand.

Keynes took the idea of demand deficiency from Thomas Robert Malthus, a nineteenth economist who published his Principles of Political Economy in 1821. Keynes was reading Malthus’s letters to Ricardo in October 1932 which was the specific reason that he would eventually write a book on demand deficiency as the cause of recession. The entire economics fraternity refuses to accept this obvious bit of inspiration since it would make Keynes’s claims to originality not quite as honest as the great man would have liked us all to believe. But since there is general consensus that Keynes formed the idea of demand deficiency in late 1932 and there is no question whatsoever that Keynes was reading Malthus in late 1932, there is equally no doubt that the standard story as peddled by Keynes is utterly untrue.

Say’s Law, which does not get mentioned by name in the video, was called the Law of Markets during classical times. The principle was given the name Say’s Law in the 1920s but it was Jean-Baptiste Say in France and James Mill in England who together are responsible for the initial crafting of this bedrock proposition. But as a very good first approximation to its meaning, there is only a rolling momentary credit to the best short statement which was given by David Ricardo in a letter to Malthus in 1821. There he wrote:

Men err in their productions, there is no deficiency of demand.

Ricardo was trying to explain to Malthus that the recessions that followed the ending of the Napoleonic Wars in 1815 were not due to there being too much saving and therefore too little spending. It was not even spending that mattered. What had gone wrong, the same thing that is the cause of all recessions, is that the goods and services produced did not match the specific demands that people with incomes had. There were therefore unsold goods and services, but not because there was too little spending and too much saving, but because businesses had produced one set of goods (housing in the US to take the most recent example of recession) that could not be sold at prices which covered their costs. The structure of production was wrong which would inevitably, as it always does, affect credit markets as defaults became legion.

The notion that recessions were caused by not enough spending, either in 1821 or in 2012, is ridiculous. There is never a deficiency of demand, only a deficiency of purchasing power. And this is the last element you need to understand the plot of the video. What gives someone purchasing power – what makes individuals within an economy able to buy more – is more production. Producing saleable products – rising productivity – is the only means by which economies can grow and therefore, beneath it all, as Friedrich Hayek explains, there must be more investment in capital (actual productive assets not money) and more innovation which improves the technology embodied in the capital. An economy is driven by supply, never demand.

That is the message of the video. It is a piece of genius that so much can be so cleverly condensed into just over four minutes. But if you wish to understand the point, these are the things you need to know. And if you wish to know even more, there is my book as well.

This has not been posted at Quadrant Online.

Who movies are made for

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This is the calculus of movie making. Makes sense to me:

Hollywood has always made most movies for a juvenile crowd. A producer, I think his name was Zanuck, worked out the logic like this: Girls will see anything boys will see, but boys will not see most things girls will see. Younger kids will see anything that older kids will see, but older kids will not see things made for younger kids. Adults will see most things that older teenagers will see, but older teenagers will not necessarily see things that adults would see. Therefore, the correct money-making demographic to make a movie for is a 17 year old boy.

Political systems

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I’ve never liked the American political system since like all complex social contrivances built to human specifications there are serious flaws. Here in Australia, because of the organic growth of the system we have inherited through the development of the Parliamentary system in the UK, at least we have a permanent leader of the opposition and a party that collectively determines its policies and then lines up as one behind its leader.

But in the US Romney is as old news as he can possibly be. There is therefore no single person to focus the opposition to Obama, least of all the media. The media here may well turn out as poisonous for the right as they are in the US. But we do have an official opposition and they do have a single policy and their views can be made known and their views are being made known, and we have compulsory voting so many of the flawed elements of the American system don’t apply. We may have others of our own, just not those.

But it’s likely to be a close election. Gillard is not yet to be written off.