Krugman on Keynes

Keynes Is Slowly Winning by Krugman

On Not Being Stupid by Krugman

Keynes and the ZLB

The Liquidity Trap, the Great Depression, and Unconventional Policy: Reading Keynes at the Zero Lower Bound by Richard Sutch

old Keynesian critique

Milton Friedman’s economics and political economy: an old Keynesian critique by Thomas Palley

New Left Review criticizes Lords of Finance

War, Crash, Slump by Tom Mertes

Keynes and the Macmillan committee by Simon Wren-Lewis

1926 United Kingdom general strike

macro, Keynes and monetarism

Their Own Imaginary Keynes (Wonkish) by Krugman

IS-LM as “Obfuscation”? No: Thursday Focus for September 11, 2014 by DeLong

Nick Rowe on Money and Coordination Failures by David Glasner

What Is Special About Recessions in a “Monetary Economy”: Trollng Nick Rowe: Wednesday Focus for September 10, 2014 by DeLong

euthanasia of the rentier

The Euthanasia of the Rentier by Krugman

A commenter quotes John Maynard Keynes: 

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

It is, of course, a perfect quote for our times, too. It comes from the last chapter of the General Theory — a chapter that definitely bears rereading in the light of current debates. 

For what Keynes describes in this chapter is, pretty much, a condition of secular stagnation — of persistently low returns on investment, in which there is a chronic oversupply of saving. He believed, in 1936, that this would be the state of affairs in the decades ahead, and was of course wrong in that belief. But he wasn’t wrong about the possibility of such a state of affairs, and since Larry Summers came out as a secular stagnationist, the view that we may well be there now has gone mainstream. 

What struck me, looking at what Keynes wrote, were his remarks on interest rates and the return to capital: low rates of interest, he suggested,
Actually, for now at least profits remain high — but bond yields are very low.

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

would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. 

What Keynes didn’t say, but now seems obvious, is that the rentiers are unlikely to accept their euthanasia gracefully. And therein, I’d argue, lies the ultimate explanation of the persistent clamor for monetary tightening despite weak economies and low inflation. I’ve described on a number of occasions how tight-money advocates are constantly shifting their arguments — it’s about inflation; no, it’s about sound market functioning; no, it’s about financial stability — but always with the same bottom line: rates must rise now now now.

Well, what I think we’re hearing is the sound of rentiers and those who, explicitly or implicitly, work for them, demanding their natural right to earn good returns even if the resource they control isn’t actually scarce anymore. They are not willing to go gently into their euthanasia.

 From Chapter 24:

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest to-day rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce. 

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

trolling commenters

Matt Young:

"A bunch of idiotic American economists who believed John Keynes, the man with no math skills."

You can usually tell where someone is coming from by their attitude towards Keynesianism.

Keynesians

Aggregate Demand, Aggregate Supply, and What We Know (Wonkish) by Krugman

Still, we try. New Keynesians do stuff like one-period-ahead price setting or Calvo pricing, in which prices are revised randomly. Practicing Keynesians have tended to rely on “accelerationist” Phillips curves in which unemployment determined the rate of change rather than the level of inflation. 

So what has happened since 2008 is that both of these approaches have been found wanting: inflation has dropped, but stayed positive despite high unemployment. What the data actually look like is an old-fashioned non-expectations Phillips curve. And there are a couple of popular stories about why: downward wage rigidity even in the long run, anchored expectations. 

The point, however, is that the price-setting side of the models has never been an integral part of Keynesian doctrine, and the surprising resilience of inflation hasn’t undermined the core insights. 

And it remains true that Keynesians have been hugely right on the effects of monetary and fiscal policy, while equilibrium macro types have been wrong about everything.

And Robert Waldmann's Fox News inflation-distortion bubble which isn't exactly anchored expectations. It boosts expected inflation rates.

Glasner on market monetarism

Monetarism and the Great Depression by David Glasner

...
Scott is totally right, of course, to point out that the fall in interest rates and the increase in the real quantity of money do not contradict the “money hypothesis.” However, he is also being selective and unfair in making that criticism, because, in the three slides immediately following the one to which Scott takes such offense, Foote actually explains that the simple IS-LM analysis presented in the previous slide requires modification to take into account expected deflation, because the demand for money depends on the nominal rate of interest while the amount of investment spending depends on the real rate of interest. Here are the slides: 

Thus, expected deflation raises the real rate of interest and causes the IS curve to shift to the left but leaves the LM curve where it was. Thus, expected deflation explains a fall in both nominal and real income as well as in the nominal rate of interest; it also explains an increase in the real rate of interest. Scott seems to be emotionally committed to the notion that the IS-LM model must lead to a misunderstanding of the effects of monetary policy, but Foote actually shows that it can accommodate a correct understanding of the role of monetary policy in the Great Depression. 

The Great Depression was triggered by a deflationary scramble for gold associated with an uncoordinated restoration of the gold standard by the major European countries in the late 1920s, especially France and its insane central bank. On top of this, the Federal Reserve, succumbing to political pressure to stop stock market speculation, raised its discount rate to a near record 6.5%, adding to the pressure on gold reserves, thereby driving up the value of gold, and leading to expectations of further deflation. It was thus a rise in the value of gold, not a reduction in the money supply (and thus no shift in the LM curve), which was the source of the monetary shock that produced the Great Depression. IS-LM is not necessarily the best model with which to describe this monetary shock, but the basic story can be expressed in terms of the IS-LM model. 

So you may be asking yourself why, if I don’t think that Foote’s exposition of the IS-LM model seriously misrepresents what happened in the Great Depression, did I say at beginning of this post that Foote’s slides really annoy me? Well, the reason is simply that Foote seems to think that the only monetary explanation of the Great Depression is that of Milton Friedman: that the Great Depression was caused by an exogenous contraction in the US money supply. That is totally wrong. What caused the Great Depression was an international disturbance to the value of gold, caused by the independent actions of a number of central banks, most notably the insane Bank of France, which was maniacally trying to convert all its foreign exchange reserves into gold, and the Federal Reserve, which was obsessed with the suppression of a non-existent stock market bubble on Wall Street. It was a bubble only because the combined policies of the Bank of France and Fed wrecked the world economy and drove into Depression. The decline in the nominal quantity of money in the US, the great bugaboo of Milton Friedman, was truly an epiphenomenon. But as Ron Batchelder and I have shown, Gustav Cassel and Ralph Hawtrey had already diagnosed and explained the causes of the Great Depression fully a decade before it happened. Unfortunately whenever people think of a monetary explanation of the Great Depression, they think of Milton Friedman, not Hawtrey and Cassel. Scott Sumner understands all this, he’s even written a book – a wonderful book – about it. But he’s gets all worked up about IS-LM. I could not care less about IS-LM, it’s idea that monetary cause of the Great Depression was discovered by Milton Friedman that annoys the [redacted] out of me.

euthanasia of the rentier

TRYING AND FAILING TO UNDERSTAND THE 84TH BIS ANNUAL REPORT: MONETARIST, DELEVERAGING, FISCALIST, AND ??? UNDERSTANDINGS OF OUR CURRENT DILEMMAS: THE HONEST BROKER FOR THE WEEK OF JULY 5, 2014 by DeLong

The Euthanasia of the Rentier by Krugman

A commenter quotes John Maynard Keynes:

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

It is, of course, a perfect quote for our times, too. It comes from thelast chapter of the General Theory — a chapter that definitely bears rereading in the light of current debates.
For what Keynes describes in this chapter is, pretty much, a condition of secular stagnation — of persistently low returns on investment, in which there is a chronic oversupply of saving. He believed, in 1936, that this would be the state of affairs in the decades ahead, and was of course wrong in that belief. But he wasn’t wrong about the possibility of such a state of affairs, and since Larry Summers came out as a secular stagnationist, the view that we may well be there now has gone mainstream. 

What struck me, looking at what Keynes wrote, were his remarks on interest rates and the return to capital: low rates of interest, he suggested,

would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. 

Actually, for now at least profits remain high — but bond yields are very low. 

What Keynes didn’t say, but now seems obvious, is that the rentiers are unlikely to accept their euthanasia gracefully. And therein, I’d argue, lies the ultimate explanation of the persistent clamor for monetary tightening despite weak economies and low inflation. I’ve described on a number of occasions how tight-money advocates are constantly shifting their arguments — it’s about inflation; no, it’s about sound market functioning; no, it’s about financial stability — but always with the same bottom line: rates must rise now now now. 

Well, what I think we’re hearing is the sound of rentiers and those who, explicitly or implicitly, work for them, demanding their natural right to earn good returns even if the resource they control isn’t actually scarce anymore. They are not willing to go gently into their euthanasia.

uncertainty

Insufficient Demand vs?? Uncertainty by Nick Rowe

Krugman concurs.

Friedman vs. old Keynesians

Milton Friedman’s economics and political economy: an old Keynesian by Thomas Palley

Palley and marginal theory

The flimflam defense of mainstream economics by Thomas Palley

The essence of Keynes’ economics was the liquidity preference theory of interest rates and rejection of the claim that price and nominal wage flexibility would ensure full employment. New Keynesians abandon both. They replace liquidity preference theory with loanable funds interest rate theory and they use price and nominal wage rigidity to explain cyclical unemployment.

...In my view, it is better labeled new Pigovian economics since it relies on market imperfections and frictions, which were the hallmarks of Pigou’s economic thinking. That makes for bitter irony as Pigou was Keynes’ greatly respected intellectual opponent in the 1930s and his thinking now passes under the Keynesian banner, displacing Keynes’ own ideas.

This is where it gets complicated:

The “no conceptual failure” claim also stretches the truth. The list of failures includes failure to anticipate the crisis; underestimating the effectiveness of fiscal policy in recessions; failure to incorporate the demand effects of debt and the dangers of debt-deflation; failure to incorporate the demand effects of income distribution; and failure to anticipate secular stagnation. In contrast, heterodox economists did well on all these counts.

 Links?

academic economics, old and new Keynesian theory

 Keynesian Economics and the Journals by Krugman

So consider two hypotheses. One — which Cochrane appears to believe — is that being inside the Beltway has rotted Janet’s and Olivier’s brains, not to mention that of all their researchers, causing them to revert to primitive concepts that “everyone” knows are false. The other — which is what I hear from young economists — is that there is an equilibrium business cycle claque in academic macroeconomics that has in effect blockaded the journals to anyone trying to publish models and evidence that stress the demand side.

Obviously you know which story I believe. The main point, though, is that trying to argue from authority is even sillier here than in most situations. There’s a huge difference between “nobody believes that” and “none of my friends will let that get published in the journals they control”.

Oh Dear: Megan McArdle Relies on John Cochrane, and so Goes Badly Astray… by DeLong

How to be a New Keynesian and an Old Keynesian at the same time by Simon Wren-Lewis

sticky wages and downward nominal wage rigidity

Sticky Wages and the Macro Wars by Krugman

Simon Wren-Lewis, following up on Bryan Caplan, makes the case that downward nominal rigidity of wages is simply a fact, attested to by overwhelming evidence. Furthermore, it’s a fact that we understand fairly well in terms of behavioral economics. So he suggests that the unwillingness of many macroeconomists to incorporate this fact in their models — because it doesn’t have “microfoundations” — says something disturbing about the state of the field.  

He’s right, but I have the sense that many of his readers — and just about all of Caplan’s commenters — don’t understand the significance of this observation for the history of macroeconomics over the past 40 years.  

You see, the question of wage (and price) stickiness, and hence of real effects of changes in nominal demand, was what the great rejection of Keynesianism was all about. And I mean all about. Back in the 70s, there was hardly any discussion of the determinants of nominal demand; what Lucas and his followers were arguing was that Keynesianism must be rejected because it was unable to derive wage stickiness from maximizing behavior.

Lucas initially argued that unexpected nominal shocks still mattered, because people couldn’t initially distinguish them from real shocks, but that this offered no room for useful policy. Later, freshwater economics rejected even that proposition; the business cycle was all about real shocks, with demand playing no role at all.

At no point was this rejection of Keynesianism driven by superior empirical performance; it was all about the principle, about refusing to incorporate anything that wasn’t derived from maximization all the way.

So you can’t say, “Well, OK, maybe people aren’t hyperrational, and wages really are sticky” and then go back to hating on Keynesians. Grant that one point — as you should, because the evidence is overwhelming — and you’ve conceded, whether you know it or not, that much of macroeconomics spent three-plus decades following a blind alley.

I see that some of Caplan’s commenters are willing to accept that nominal demand matters, but draw the line at “nonsense” like the liquidity trap. Well, the zero lower bound is also a fact, and once you start admitting that demand matters, you’ll find yourself inexorably arriving at liquidity-trap analysis. But leave that for another day. The key point here is that to concede the obvious about nominal wages is, like it or not, to concede that Lucas, Prescott, and so on were just a great detour away from useful macroeconomics.

and

Wage Flexibility in Doctrine and Policy (Wonkish)

New vs. Old Keynesians and self-correction

Why Keynes wouldn’t have too rosy a view of our economic future by Mike Konczal

Auto-Corect Nt Wokring (Wonkish) by Krugman

Cheap Thoughts on the Self-Correcting Economy: Konczal vs. Krugman by Dean Baker

In short, it doesn't look like the long-term holds out much hope for much of a rebound in these components of private sector spending. Net exports, the one major item that both Konczal and Krugman left out, is more promising. We continue to run a trade deficit of more than 3 percent of GDP, which would likely be over 4 percent of GDP if we were at full employment. This is sustained by developing countries buying up vast amounts of dollars to hold as reserves. This props up the dollar and allows them to keep their export markets in the United States. In effect, they are paying us to buy their stuff.

At some point developing countries will realize that they don't have to pay us to buy their stuff, they can pay their own people to buy their stuff. When they come to understand this fact, they will stop buying dollars and the dollar will fall against the currencies of our trading partners. This will make U.S. goods more competitive internationally, leading to more exports and fewer imports, and a return to full employment.

Anyway, this is the happy long-run story, but don't hold your breath on it. If you want to see people get back to work anytime soon the government is going to have to do it. And that's true no matter how much you like the private sector.

UPDATE: More here (Krugman), here (Baker), here (Rowe), here (Yglesias) and here (more Krugman).

devalue or deflate and downward nominal wage rigidity

BRAD DELONG (1996): REVIEW OF JOHN MAYNARD KEYNES, "A TRACT ON MONETARY REFORM": TUESDAY BOOK REVIEW WEBLOGGING by DeLong

DeLong quotes Keynes on the options government have when enacting policies to return to full employment and close the output gap.

Chapter four--"Alternative Aims in Monetary Policy"--sees Keynes shift from analyst to advocate: he comes down, in the context of Western Europe in the 1920s, on the side of devaluation to bring official currency values in line with relative national price levels rather than of deflation to force national price levels into consistency with pre-WWI exchange rate parities. He argues that when you are forced to choose between maintaining a stable exchange rate and maintaining a stable internal price level, choose the second. For avoiding fluctuations in your internal price level avoids a host of evils:

We see, therefore, that rising prices and falling prices each have their characteristic disadvantage.... Inflation is unjust and Deflation is inexpedient.... [I]t is not necessary that we should weigh one evil against the other. It is easier to agree that both are evisl to be shunned. The Individualistic Capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient--perhaps cannot survive--without one...

He argues against return to the gold standard, on the grounds that modern central banks can do a better job of maintaining price stability if they are not tied to gold. Keynes's arguments in chapter four look very good: current opinion among economic historians, exemplified by Barry Eichengreen's Golden Fetters: The Gold Standard and the Great Depression, is that attachment to gold did a large part of the work in preventing central banks from stemming the Great Depression of the 1930s.

Over the past 5 years, the economy has been growing but not enough to make up for lost ground and close the output gap. Demand management  (fiscal, monetary and trade policy) has been such that the economy has achieved slow growth and a sort of deflation in hysterisis - an increase in long term unemployment and a degradation of the economy's productive capacity. Downward nominal wage rigidity has prevent outright deflation and a return to full employment by that painful route.

Krugman, Keynes, Kalecki, Konczal by John Quiggin

Keynes, Kalecki, Konczal, etc. by Krugman

“cheap” or “dear” money

Friedman’s Dictum by David Glasner

In his link, DeLong quotes 

Friedman never understood that under the gold standard, it is the price level which is fixed and the money supply that is endogenously determined, which is why much of the Monetary History ... is fundamentally misguided owing to its comprehensive misunderstanding of the monetary adjustment mechanism under a convertible standard.

"endogenously determined" - "produced or grown from within."

Endogenous money

Endogenous money creation or destruction is the concept that each participant in the economy has their own version of a 'printing press' for money. This concept was explained by Irving Fisher in his treatise on The Theory of Interest (1930) in terms of the value of currency being affected by two (potentially opposing) movements - expected growth in the money supply reducing the real purchasing powerof money and expected increases in productivity increasing the real purchasing power of money.

This means that participants can affect the value of currency in a number of ways:

• Investment choices to invest in 'non productive' money equivalents rather than to invest directly in productive assets effectively increases the money supply, reducing the real value of currency.
• Demands for higher wages or supplier payments can increase the financing requirements of firms, creating a risk of 'supplier led inflation', effectively reducing the real value of currency.
• Choices made about the level of contribution to productivity can increase the real value of currency, (in fact this is the only mechanism which provides any basis for the real value of currency.)

This all adds up to the conclusion that participants have the power to affect the value of currency, albeit via less direct and potentially less effective mechanisms than simple printing of money by the central bank (exogenous money creation.)

Banks and the Monetary Base (Wonkish) by Krugman

Now, think about what happens when the Fed makes an open-market purchase of securities from banks. This unbalances the banks’ portfolio — they’re holding fewer securities and more reserve — and they will proceed to try to rebalance, buying more securities, and in the process will induce the public to hold both more currency and more deposits. That’s all that I mean when I say that the banks lend out the newly created reserves; you may consider this shorthand way of describing the process misleading, but I at least am not confused about the nature of the adjustment. 

And the crucial thing is that there are no puzzles or misunderstandings here. Tobin and Brainard got it all straight half a century ago, and anyone who thinks that there’s a big flaw in their reasoning is almost surely just getting caught up in his own word games.

Competition for loanable funds

To be able to provide home buyers and builders with the funds needed, banks must compete for deposits. The phenomenon of disintermediation had to dollars moving from savings accounts and into direct market instruments such as U.S. Department of Treasury obligations, agency securities, and corporate debt. One of the greatest factors in recent years in the movement of deposits was the tremendous growth of money market funds whose higher interest rates attracted consumer deposits.^[16]

To compete for deposits, US savings institutions offer many different types of plans:^[16]

• Passbook or ordinary deposit accounts — permit any amount to be added to or withdrawn from the account at any time.
• NOW and Super NOW accounts — function like checking accounts but earn interest. A minimum balance may be required on Super NOW accounts.
• Money market accounts — carry a monthly limit of preauthorized transfers to other accounts or persons and may require a minimum or average balance.
• Certificate accounts — subject to loss of some or all interest on withdrawals before maturity.
• Notice accounts — the equivalent of certificate accounts with an indefinite term. Savers agree to notify the institution a specified time before withdrawal.
• Individual retirement accounts (IRAs) and Keogh plans — a form of retirement savings in which the funds deposited and interest earned are exempt from income tax until after withdrawal.
• Checking accounts — offered by some institutions under definite restrictions.
• All withdrawals and deposits are completely the sole decision and responsibility of the account owner unless the parent or guardian is required to do otherwise for legal reasons.
• Club accounts and other savings accounts — designed to help people save regularly to meet certain goals.

Better branding than the "dismal science"

KEYNESIAN ECONOMICS: THE GAY SCIENCE? by DeLong