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Keynesians fighting like rats in a sack

An interesting item about how economists influenced by the teachings of the late JM Keynes are falling out with one another.

Here is a quote worth pondering from Henry Hazlitt: “Keynes constantly deplored saving while praising investment, persistently forgetting that the second was impossible without the first.” Page 203, The Wisdom of Henry Hazlitt.

10 comments to Keynesians fighting like rats in a sack

  • Andrew Zalotocky

    Obviously they need a stimulus package to buy a bigger sack!

  • persiflage

    How does Hazlitt’s observation of inconsistency hold up, now that the current Keynesians have repurposed the word “investment” as a synonym for “taxes”?

  • Paul Marks

    Of couse to Keynes “investment” includes all government spending (bar repaying debt) and monetary expansion is “savings” (“as real as any other kind”).

    These doctrines are false – one can argue about whether they are technically “insane” (i.e. about whether those who believe in them are formally mentally ill), but the important thing is that these doctrines (and all other Keynesian doctrines) are false.

    As for various factions of Keynesians arguing with each other – and reading the articles of Keynesnians (such as Jim Galbraith) there is a big downside to doing this.

    Firstly it is a waste of time (one is not going to convince someone like JKG, or his followers, by evidence or rational arguement – such people are much like members of a cult). But it is more than this – for one can do what one normally does with essays, books (and so on).

    One normally gets “the facts” and then one looks at the “argument”.

    But the left (Keynesians and nonKeynesians – for it should be rememberd that classical Marxists, and there are still a few about who have not fallen in line with P. Straffa and the rest of modern Marxism, OPPOSE Keynesian doctrine indeed they opposed “Keynesian” ideas long before Keynes was born – see Hunter Lewis’ comments in “Where Keynes Went Wrong”)…

    Anyway the left are LIARS – they produce “facts” that are no such thing.

    They will talk about “cuts” when there are no cuts (indeed where there are increases in government spending), they will even describe ardent big government types like George Walker Bush as “free market fundementalists” (if it serves their political purpose to do so).

    And it must be stressed that they are not making honest mistakes – they are LYING.

    When one reads a piece of work by a leftist one will tend to find lie after lie after lie. There is no way to really divide the “argument” from the “facts” because they are all twisted together – and the “facts” are lies.

    Whether it is Lancashire people being forced into the cotton mills by (nonexistent) Enclosure Acts, or (also nonexistent “deregulation” under George Walker Bush, one is dealing with a web (or a mist) of lies. And the whole structure of the leftist “argument” is from these lies.

    By all means expose the lies if you can (that way some of the people who are not yet totally brainwashed followers, might be saved), but communicating with the leftists themselves?

    Unless you want to end up as bald and gray as me – it is a bad idea.

    Remember all these factions (no matter how much they may fight each other) want to utterly distroy civil society and replace it with something “closer to their heart’s desire” (yes that it as true of the nonMarxist Keynesians as it is of the Marxists or any othe group of leftists) and will tell any lie and commit any crime to achieve their (evil) end.

  • Mark G

    Paul, are you saying the Enclosure Acts never happened, never happened in Lancashire, or didn’t force people into contton mills?

  • Mark G

    Paul, are you saying the Enclosure Acts never happened, never happened in Lancashire, or didn’t force people into cotton mills?

  • Current

    I’m a little sceptical about the motivations of Keynesians, especially the more high profile ones. But, I think there are genuine reasons why people believe it.

    I’m planning to write a paper on this, but here’s a little outline.

    It’s essential first to understand what Keynesians think we think. You will sometimes here the argument made that because of the structure of the GDP equation Investment I is equal to Savings S. But, this isn’t really true, the GDP equation isn’t a force, it’s an accounting tautology. If savings or investment change then GDP may fall or rise to accomodate that. Now, unfortunately some people make this argument about GDP (Austrians generally don’t some supply siders, and Chicago economists have).

    Like other markets the savings-investment market has supply and demand. The supply of savings is the total amount of funds that savers leave with banks. It is not the increment or “flow” of new savings from the GDP equation, that’s only part of savings. Similarly, we have loans to businesses on the other side, the demand side. The demand side isn’t the increment of new loans that go to business, or the increment of new capital goods they pay for with those loans. However, according to the GDP based “S=I”view which was prominent in Cambridge before Keynes the savings-investment market is associated with these increments. The same sort of thing is true of the closely associated stock market. The price of existing shares is the dominant force, the change in quantity of shares through new issues or bankruptcies is small.

    Now, Keynes and the Keynesians realised that this was wrong, but not clearly. They didn’t know much about microeconomics so the assumed that the established view of savings and investment must be consistent with marginalism. They then invented ad hoc methods of dealing with the issue.

    These are described in chapter 11 & 12 of “General Theory”. What they claim, basically is that the flow of new savings may not lead to new investment. They may instead lead to a rise in the price of existing assets. For example, someone may buy Vodafone shares with income. That will not cause Vodafone to immediately increase their capital investment, though it may over time. Keynes made an analogy here with the game of “musical chairs”. He needn’t have bothered, if he’d looked at things through the rigourous austrian marginalist view he would have seen that it’s the two halves of the savings-investment market are the stocks.

    Keynes’ concern wasn’t entirely foolish, in a recession there is a “flight to quality”. That is purchase of dependable assets instead of more risky ones. But, it’s investment in risky businesses that leads more directly to investment spending. But, what they missed is that decisions like this must be market based.

    Keynes and the Keynesians convinced themselves that their “IS curve” and “LM curve” were independent. That means that no market process controls the relationship between GDP output prices and asset prices. This is wrong, entrepreneurs and investors control it.

    The Keynesians convinced themselves that capital was “fixed in the short run” (Keynes assumes this is GT Chap4). And as a result if the capital endowment of a country created a GDP of X in one year then it must be able to produce at least that in the next year. All that is required is that the “savings drain” must be surpressed. That is income that is saved must not be allowed to be turned into higher asset prices, it must be turned into output of investment goods. If the market can’t do that then the government must step in and deficient spend to prevent a fall in incomes.

    It’s this part that is most wrong. If savings lead to greater capital prices then that is because capital *is worth more* in the view of investors, who are closest to the situation and most likely right. Keynes thought that capital was always competing, that is any extra unit of capital must devalue all existing units. That’s wrong, sometimes capital is complementary because a new machine or process may improve the output of an existing asset making that exisiting asset more valuable.

    Investment spending must be under the control of the market and not manipulated by short-run effects. If it isn’t then the assumption that “capital is fixed in the short run” will fail in the longer run. In Keynesian terms the “IS Curve” must be allowed to be endogenous.

  • Paul Marks

    Mark G. – I thought I was clear. I was talking about “Lancashire people” (i.e. the heart of the industrial revolution).

    Percentage of Lancashire land enclosed by Act of Parliament in the 18th and 19th centuries – zero per cent (if my memory serves – if I am mistaken no doubt someone will correct me). Quite a few other counties were much the same (and not just in the far north or west – for example the figure for Kent is also zero, but I know one person of Kent he will not accept that, but then he also thinks the Normans enslaved the people of Kent back in 1066, perhaps he should check out the motto of his own county).

    Only one country in all of England and Wales had a majority of land enclosed by Act of Parliament in the 18th and 19th centuries – and I am sitting in it (Northamptonshire).

    I rather doubt that vast masses of people went up from here to cotton mills in Lancashire and the West Riding of Yorkshire – but, again, I could be mistaken.

    But there is one thing that blows the whole thing out of the water – the number of people working on the land went UP (yes UP) during the industrial revolution.

    Indeed the peak census year for the number of people working in farming in England is 1851 – it is only in the late 19th century (long after the industrial revolution) that the number of people working on the land in England starts to drop.

    Of course the agricultural revolution hit some tenant farmers (especially in the East Midlands) and YES there was an alternative.

    But that alternative is the peasant plot farming of someone like most of Ireland in the early 19th century (or the Highlands of Scotland) – an accident waiting to happen (and it did happen in Ireland – as it has happened to peasant plot farming many times in many nations).

    Peasant plot farming is a mess – people like Townsend were heros who helped feed the cities (i.e. the EXPANDING POPULATION) as well as save farming.

    Nor was the peasant plot farming of Ireland in any way “natural” – it had, in fact, been created by a series of interventions (such as the Penal Laws) that set up a structure in Ireland that even the repeal of the laws that created it could not “unmake”.

    So nature unmade it – with the brutality one should expect of nature.

  • Paul Marks

    In case people do not understand what I am saying……

    Rise in population in England.


    Subdivide the land into ever smaller peasant plots (like a lot, although not all, of Ireland).


    Move to a different system of farming – no more big open fields and strips.

    In the areas of the country that actually still had that system by the 18th century (a lot did not).

    Although, yes, there is a tiny area of Leicestershire that still keeps the open field and strip system to this day.

    It even spread to one of the American colonies (no prizes for guessing which one).

    Indeed full scale communalism (or communitarism) was tried in this colony (NOT how the open field system worked in England itself).

    It led to starvation and had to be abandoned.

    That is the real story of the colony.

    Oh dear I have left out the Disney the-native-Americans-showed-them-how-to-live-in-harmony-with-mother-nature stuff (as taught in every American school).

    In real life New England has vile soil (full of stones) and “Mother Nature” keeps trying to kill you – every winter in fact (if not in the summer as well). And the lovely “native Americans” took time off from tying to kill each other (their normal pass time) to trying to kill you as well.

    Only people who learned to be as hard as nails could survive in such a place, in such a situation.

    Sure there was lots of injustice (on all sides) and YES sickness killed very large numbers of people whose immune systems were not ready for European germs (but NO – there was no deliberate policy of infecting anyone, in fact the Europeans could not understand what was happening), but there is also a lot of garbage taught.

    My favourate example is from (I seem to remember) Thomas Woods.

    He (if it is Woods) is fond of pointing out that the first time he doubted official American history was as a boy – when every day (to get to school) he passed members of a tribe that (according to the school books) was listed as exterminated by his evil anncestors.

    So either the people he passed each day were the “walking dead” or ……

    Of course each tribe faught other tribes and interbred.

    And Anglos faught other tribes and interbred with them also – millions of Anglo Americans have indian blood in them.

    Indeed even at the famous battles it was not always a question of “Red versus White”.

    Some of the leaders of tribes that early 19th century Americans faught would have passed for white (just by changing their clothing).

    And even as late as the 1876 campaign the Crow were a lot more effective against the Sioux than Custer was (although that is not sayihg much).

    Of course the Crow knew that the “Black Hills have always belonged to us – they are filled with the spirits of our forefathers” line was bullshit, because the Sioux had driven them (the Crow) out of the Black Hills only a few years before (and the Crow had…..).

    Still no one wants to know what actually happened.

    In the old days people wanted stories of heroic white people fighting terrible red people – not a mixture of white and red people fighting another mixture of white and red people.

    And these days people still want a simple story – they just want the good guys to be the other ethnic group.

  • Do rats fight in sacks? I thought it was ferrets.

  • “Keynesians fighting like rats in a sack”

    Put them in a transparent sack, please. I want to watch.