Bartlett on Keynes

Bruce Bartlett has a characteristically thoughtful piece on Keynes:

Brad DeLong, an economist at the University of California, Berkeley, has posted a long list of conservative attacks on Keynes that have used his homosexuality as a reason to reject his economic theories. But even economists who had no interest in this aspect of Keynes’s life, like the economist James Buchanan, have criticized Keynesian economics for its excessively short-term focus and negative long-run consequences.

Unfortunately, Keynes himself was to a large extent responsible for giving this criticism of his work currency. That is because he titled his most important work “The General Theory of Employment, Interest and Money.” The term “general theory” obviously implies that it is applicable at all times, in all economic situations.

This was an unfortunate error, because the core insight of Keynesian economics is that there are very special economic circumstances in which the general rules of economics don’t apply and are, in fact, counterproductive.

This happens when interest rates and inflation are so low that there is no essential difference between money and bonds; money, after all, is simply a bond that pays no interest. When this happens, monetary policy becomes impotent; an increase in the money supply has no stimulative effect because it does not lead to additional spending by consumers or businesses.

This is interesting.  Both John Hicks and Milton Friedman also thought the liquidity trap was the core insight of the General Theory.  In Friedman’s case, perhaps I should say the core “idea,” as he didn’t think much of the concept.  But Keynes himself actually thought his theory was much more general, and so do many of his followers (who like to quote Keynes’s statement that it is unlikely that there has ever been a case of absolute liquidity preference.)

I think Hicks and Friedman were right and Keynes was wrong.  Keynes certainly saw the impact of FDR’s dollar depreciation policy of 1933.  When FDR finally gave in to pressure from people like Keynes, and stopped devaluing the dollar, Keynes congratulated him for ignoring the advice of the “extreme inflationists.”  Keynes once said that the only monetary regime that was worse than a pure gold standard was a pure fiat money regime.  That’s the real reason Keynes worried about monetary policy ineffectiveness at the zero bound; he opposed what Lars Svensson calls the one foolproof escape technique—devaluing as much as it takes to generate higher inflation rates.

Bartlett continues:

Keynes called this situation a “liquidity trap.” Under such circumstances, government spending can be highly stimulative because it causes money that is sitting idle in bank reserves or savings accounts to circulate and become mobilized through consumption or investment. Thus monetary policy becomes effective once again.

This is an extremely important insight that policy makers have yet to grasp, even though interest rates on Treasury bills are just a couple of basis points above zero and inflation is virtually nonexistent.

Here I think that Bartlett has things exactly backward.  I believe most policymakers do agree with Keynes and Bartlett, i.e. they wrongly believe that monetary policy is ineffective at the zero bound.  That’s why it took the Japanese 20 years to even attempt a policy of inflation.  That’s why New York Fed President Dudley now says that Fed policy was too tight in 2009, but wasn’t saying that in 2009.  That’s why the non-German European governments haven’t been pressuring the ECB to boost NGDP.  That’s why Ed Balls opposes a higher inflation target for the BoE.

In the 1930s FDR knew how to debase a currency.  Modern policymakers seem to have forgotten how, and thus embarked on a long and fruitless detour into the morass of fiscal stimulus.

HT:  Caroline Baum

PS.  I may be on Bloomberg radio (Boston) tomorrow morning around 9am.


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43 Responses to “Bartlett on Keynes”

  1. Gravatar of Joe Eagar Joe Eagar
    7. May 2013 at 16:48

    Okay, I’m only going to say this once: Keynes was bisexual. I’d suggest Bruce Bartlett read the following:

    http://en.wikipedia.org/wiki/Bisexual_erasure

    I hate this sort of thing.

  2. Gravatar of MarketMonetarist MarketMonetarist
    7. May 2013 at 16:51

    The “extreme inflationists.” of the 30s, today would be the market monetarists of the 21 century?

  3. Gravatar of Jack Cunningham Jack Cunningham
    7. May 2013 at 16:52

    Why do you consider fiscal stimulus to be fruitless?

  4. Gravatar of Joe Eagar Joe Eagar
    7. May 2013 at 17:17

    What are we going to stimulate, Jack? We tried the easy stuff like tax cuts and transfers, and it didn’t work. The only remaining option is direct government spending, preferably on positive-return infrastructure projects, but such spending is itself not possible. There is simply too much red tape and too many delays.

    Monetary policy is much more effective, even in unusual times like now.

  5. Gravatar of marcus nunes marcus nunes
    7. May 2013 at 17:44

    “In the 1930s FDR knew how to debase a currency. Modern policymakers seem to have forgotten how, and thus embarked on a long and fruitless detour into the morass of fiscal stimulus.”
    Quite true and PK is the modern day FS troubadour:
    http://thefaintofheart.wordpress.com/2013/05/07/krugmans-bias/

  6. Gravatar of W. Peden W. Peden
    7. May 2013 at 17:58

    He gets the liquidity trap wrong: Keynes defined the liquidity trap as a situation where an increase in the quantity of money cannot reduce the yield on long-term government bonds.

    It’s amazing how Keynes has lost the debate so badly against Hawtrey that even Keynesians don’t even remember his position, let alone defend it. That’s a bigger insult to his greatness than a very popular historian spouting off rubbish about his sexuality.

  7. Gravatar of W. Peden W. Peden
    7. May 2013 at 17:58

    * Apologies for the mixed metaphor: rubbish does not spout.

  8. Gravatar of Saturos Saturos
    7. May 2013 at 19:01

    So Keynes himself made the same AD fallacy that people like Balls make today: fiscal stimulus makes growth, monetary policy makes inflation. I guess these people really can call themselves Keynesians.

  9. Gravatar of Geoff Geoff
    7. May 2013 at 19:26

    I think the focus on disproving Keynes’ “liquidity trap” doctrine, by way of emphasizing that with enough monetary inflation, interest rates can rise without any government spending, is an extremely superficial criticism of Keynesianism.

    Bartlett doesn’t seem to understand the actual core of Keynesian theory. It is not the “liquidity trap”, or the notion that “general economic rules” do not apply at the zero bound. The core of Keynesianism can be summarized by a very important passage in the General Theory:

    “Perhaps it will help to rebut the crude conclusion that a reduction in money-wages will increase employment “because it reduces the cost of production”, if we follow up the course of events on the hypothesis most favourable to this view, namely that at the outset entrepreneurs expect the reduction in money-wages to have this effect. It is indeed not unlikely that the individual entrepreneur, seeing his own costs reduced, will overlook at the outset the repercussions on the demand for his product and will act on the assumption that he will be able to sell at a profit a larger output than before. If, then, entrepreneurs generally act on this expectation, will they in fact succeed in increasing their profits? Only if the community’s marginal propensity to consume is equal to unity, so that there is no gap between the increment of income and the increment of consumption [Geoff: i.e. no additional saving]; or if there is an increase in investment, corresponding to the gap between the increment of income and the increment of consumption, which will only occur if the schedule of marginal efficiencies of capital has increased relatively to the rate of interest [Geoff: i.e. either the MEC schedule must somehow move to the right, which there is allegedly no reason for its doing, or the rate of interest must fall, which it can’t do, if it is already at 2%]. Thus the proceeds realised from the increased output will disappoint the entrepreneurs and employment will fall back again to its previous figure, unless the marginal propensity to consume is equal to unity [Geoff: i.e. there is no additional saving] or the reduction in money-wages has had the effect of increasing the schedule of marginal efficiencies of capital relatively to the rate of interest and hence the amount of investment [Geoff: i.e. an increase the amount of investment that is profitable””i.e., yields 2% or more]. For if entrepreneurs offer employment on a scale which, if they could sell their output at the expected price, would provide the public with incomes out of which they would save more than the amount of current investment, entrepreneurs are bound to make a loss equal to the difference; and this will be the case absolutely irrespective of the level of money wages.” – The General Theory, J.M. Keynes, pgs 261-262.

    That bolded passage is THE core of Keynesian theory. Everything else follows from it.

    The following passage, found earlier in the General Theory, provides conclusive evidence that the above is indeed the core of Keynesianism:

    “Thus for a society such as we have supposed, the position of equilibrium, under conditions of laissez-faire, will be one in which employment is low enough and the standard of life sufficiently miserable to bring savings to zero. More probably there will be a cyclical movement round this equilibrium position. For if there is still room for uncertainty about the future, the marginal efficiency of capital will occasionally rise above zero leading to a ‘boom’, and in the succeeding ‘slump’ the stock of capital may fall for a time below the level which will yield a marginal efficiency of zero in the long run. Assuming correct foresight, the equilibrium stock of capital which will have a marginal efficiency of precisely zero will, of course, be a smaller stock than would correspond to full employment of the available labour; for it will be the equipment which corresponds to that proportion of unemployment which ensures zero saving.” – J.M. Keynes, The General Theory, pgs 217-218

    The “liquidity trap” is but a byproduct of the above. My take is that the reason it is focused on, is because it serves as a springboard for MMs and other monetarists to market themselves, to advertise an important feature of their own theories. “Making a mountain out of a molehill”, so to speak. Exaggerating the importance of a argument so as to present one’s counter-argument as more important.

  10. Gravatar of Geoff Geoff
    7. May 2013 at 21:44

    What inflation?

    http://www.theblaze.com/stories/2012/10/17/not-just-gas-check-out-the-drastic-price-increases-on-these-21-everyday-items/

    Between 2002 and 2012, prices for the following goods has risen by:

    Eggs: 73%

    Coffee: 90%

    Peanut Butter: 40%

    Milk: 26%

    A Loaf Of White Bread: 39%

    Spaghetti And Macaroni: 44%

    Orange Juice: 46%

    Red Delicious Apples: 43%

    Beer: 25%

    Wine: 60%

    Electricity: 42%

    Margarine: 143%

    Tomatoes: 22%

    Turkey: 56%

    Ground Beef: 61%

    Chocolate Chip Cookies: 39%

    Gasoline: 158%

    OBVIOUSLY MONEY IS TOO TIGHT. AFTER ALL, I CAN STILL AFFORD FOOD BY CUTTING BACK ON OTHER GOODS!

    Please Bernanke, listen to Dr. Sumner and put me closer to not being able to afford food. My wages are sticky and I want to buy fewer goods!

  11. Gravatar of Ashok Rao Ashok Rao
    7. May 2013 at 22:06

    I don’t think it’s that Keynes didn’t like devaluation overall as much as believed the cost of devaluation was too high precisely at the ZLB. Also, the dollar is (unfortunately) an international store of value. Doesn’t that change the dynamics, a bit?

    Oh, and I thought a “general theory” had more to do with the understanding of a “general equilibrium” than the colloquialism?

  12. Gravatar of Frederic Mari Frederic Mari
    7. May 2013 at 22:59

    I actually would like to see Geoff’s point answered.

    We – a lot of people, at least – are getting our/their purchasing power shredded to pieces.

    How’s inflation going to help? This is my biggest gripe with Sumner. First, QE seems to do very little but I am willing to admit that ‘well, we didn’t get the kind of crash we got in the mid-30s despite similar/comparable/whatever fiscal contractions’ is actually a solid argument pro Sumner. Overall, we (well, the USA) didn’t go over a cliff and you can reasonably credit monetary policy for that.

    But how MORE inflation would help? By forcing people with cash to spend? By encouraging people to get fixed rates loans? I just don’t buy that and, until I see some proof/some reasoning beyond ‘well, who would keep saving if money is losing value?’, I am not going to be convinced. I suspect the cost from higher (circa 4-5%) inflation for everyone on a fixed salary will overweight the potential benefits of lesser savings by the few cash rich entities left.

  13. Gravatar of James in London James in London
    8. May 2013 at 01:04

    Geoff: So, food is up a bit more than the 35% increase in nominal wages, but how much time do you spend eating vs trolling on the web these days? And what did that cost you in 2002?

    I always thought margarine was made from gasoline, now you’ve proved it. Best to stick to milk and tomatoes.

  14. Gravatar of libertaer libertaer
    8. May 2013 at 01:44

    To understand Keynes, I always like this anecdote about his reaction to a question by Abba Lerner.

    “…Lerner recalled putting the matter to Keynes in Washington in 1946, at the time of BrettonWoods: “Mr. Keynes, why don’t we forget all this business of fiscal policy, public debt, and all those things and have some printing presses?” To which Keynes replied: “It’s the art of statesmanship to tell lies, but they must be plausible lies” (Colander, David. 1984. Was Keynes a Keynesian or a Lernerian? J. Econ. Lit. 22(Dec.):1572-75.p. 1574)).
    (Kenneth Arrow heard a somewhat different version from Paul Baran, who remembers Keynes’s reply as, “Mr. Lerner, how many times do I have to remind you that you cannot run a government on transparent humbug?”)”
    (cited from Biographical Memoirs V.64, p.208-231: ABBA PTACHYA LERNER by DAVID S. LANDES)

    “Lies” or “humbug” here doesn’t mean that Keynes thought of “money printing” as a con in contrast to borrowing. The problem was that it would be a transparent con, which for Keynes was an oxymoron. A transparent con destroys its own effect.

    The same fear is expressed in a letter to James Meade in April 1943. Keynes writes about Lerner’s “money printing”-ideas and comments: “His argument is impeccable. But heaven help anyone who tries to put it across [to] the plain man at this stage of the evolution of our ideas” (cited in Colander, David. 1984).

    Keynes thought all hell would break loose if people saw money as something which has no inherent value or isn’t backed up by something which is sawn a having inherent value like gold. Since Keynes knew quite well that money (or gold) has no (or only a very small) inherent value apart from being the medium of exchange, people have to be tricked into believing this. Fiscal policy does the trick, monetary policy does not. It’s like the difference between a good and a bad magic trick.

    One could laugh about all this, but the sad thing is, at least here in Germany, I heard a thousand times the “argument” that if you give up price stability people would lose their trust in the currency and hyperinflation would follow. Price stability is like the new gold standard.

  15. Gravatar of W. Peden W. Peden
    8. May 2013 at 02:33

    Geoff,

    I’m amazed to read someone (supposedly) committed to capitalism complain about relative price changes.

  16. Gravatar of Ben J Ben J
    8. May 2013 at 03:28

    Frederic, you asked

    “But how MORE inflation would help?”

    If you do not understand Scott’s argument, I recommend catching up via his posts over in the sidebar. Those are important posts that he feels are representative of his views. You will probably find the answer to your question.

    If you are still having trouble, let me rephrase your question for you.

    It is best asked in two parts.

    1. Why, if you did support an inflation targeting, would you support a positive inflation target?

    2. Since you don’t support inflation targeting, why do you support a positive target for growth in NGDP?

    There are good reasons, spelt out in those posts!

    Hope this helps.

  17. Gravatar of ssumner ssumner
    8. May 2013 at 07:38

    MarketMonetarist. Yes.

    Jack, Monetary offset.

    W. Peden, Good point.

    Thanks Marcus.

    Saturos. Read the newspapers of the 1930s and you’ll see every single crackpot theory you hear today.

    Ashok, The key to understanding Keynes is to understand why he thought fiat money was the worst conceivable monetary regime. A one-time devaluation was ok, but continual devaluations meant fiat money.

    Frederic, I’m not advocating inflation, I’m advocating NGDP growth. Under my plan we’d get roughly 2% inflation, which is the Fed’s target. Right now inflation is 1%. Goeff’s inflation numbers are silly–anyone who lived through the 1970s like me knows what real inflation is. Houses are now 25% cheaper than in 2006.

    The price of gasoline is the same as 5 years ago–does that mean we’ve had no inflation over the past 5 years? Nonsense.

    Why does more NGDP help? Sticky wages.

    libertaer, So why are Germans so opposed to the ECB hitting their 2% inflation target? If they don’t ease, inflation will average 1% over the next few years.

  18. Gravatar of Randomize Randomize
    8. May 2013 at 07:55

    What was unsaid: Increasing inflation would increase the risk premiums on bonds and thus, the spread between bonds and cash. That pretty well ends any supposed liquidity traps.

  19. Gravatar of Geoff Geoff
    8. May 2013 at 10:08

    James in London:

    Aww, you sound mad that prices are rising as much as they are. A discomforting, stubborn fact is being turned into hating me. Can you get any more immature?

    “So, food is up a bit more than the 35% increase in nominal wages”

    Minimize, apologize, trivialize…the M.O. of inflationistas.

    “but how much time do you spend eating vs trolling on the web these days?”

    About 100% – 0%.

    Try looking up the definition of trolling.

  20. Gravatar of Geoff Geoff
    8. May 2013 at 10:09

    W. Peden:

    “I’m amazed to read someone (supposedly) committed to capitalism complain about relative price changes.”

    It wasn’t capitalism that made those prices rise. It was the result of the activity of a non-capitalist, non-market institution. Do none of you understand the definition of capitalism?

  21. Gravatar of Geoff Geoff
    8. May 2013 at 10:23

    Dr. Sumner:

    “I’m not advocating inflation, I’m advocating NGDP growth.”

    I’m not advocating for one effect of a cause, I’m just advocating for the other effect of the same cause.

    Even though they have the same cause.

    Advocating for NGDP growth IS advocating for price inflation, if your subjectively preferred NGDP growth rate is high enough relative to real goods production such that goods prices rise over time.

    “Under my plan we’d get roughly 2% inflation, which is the Fed’s target.”

    You’re presuming that NGDP growth affects all prices equally. That’s not the case. Simplistic models lead to bad policy proposals.

    NGDP growth of 4.5% can be synonymous with higher than 2% for (many) consumer goods, because price inflation is a “concrete steppe” process constrained to individual exchanges.

    It’s why we have seen the Dow rise exponentially while gasoline has remained stable. It’s why profits have risen faster than wages (since inflation adds to spending and hence revenues and hence profits), where wages are only increased afterwords, if they are increased at all.

    “Right now inflation is 1%.”

    Right now cannot be divorced from the past. Not all of us were born yesterday.

    “Goeff’s inflation numbers are silly-anyone who lived through the 1970s like me knows what real inflation is.”

    I guess calling a tyrant a tyrant is silly, if another tyrant can be identified as a greater tyrant.

    Real price inflation is prices increasing at any rate greater than zero, period. Since 2002, we have had real price inflation, particularly in the area of consumer goods that most people buy. Just because you can always point to Weimar, it doesn’t mean real inflation isn’t taking place.

    Relative to annualized total nominal wage growth of 3.4%, and annualizing the price inflation numbers above, real wages have declined relative to 11 out of 17 goods in the list, and most of the remaining 6 showed barely a gain.

    INB4 appeal to falsified Philips curve: It’s better to have higher price inflation and less unemployment, than lower price inflation and higher unemployment.

    “Houses are now 25% cheaper than in 2006.”

    House prices are 16% more expensive now than they were in 2002.

    “Why does more NGDP help? Sticky wages.”

    This comment is made just days after blogging about the “German Miracle.” Outstanding.

    Not even in the face of empirical falsification does MM adapt.

    “The price of gasoline is the same as 5 years ago-does that mean we’ve had no inflation over the past 5 years? Nonsense.”

    http://research.stlouisfed.org/fredgraph.png?g=iei

    Sure, if you include a large enough prior price decline, the considered price change can be made zero if you want.

    Imagine if the Fed inflated the way you wanted in 2008. That right portion of the trend after the dip, may very well have been shifted upward such that the price today would be around $5.50/gal.

    In a context of “sticky wages”, that would have cut into the standard of living of workers even more. MM prescription is literally advocating for harming workers for no other reason than for MMs to observe a particular number and feeling less anxious and more sleepy at night.

    Screw anyone whose standard of living falls because of inflation. Collateral damage. Necessary evil. Pragmatic choosing of the shortest straw. Utilitarian considerations of making some people happier at the expense of others. This evil, which I want to make permanent, is less worse than another evil which is somehow malleable. Pick the irrational standard of the day. Then congratulate oneself for not being a particular name: demagogue, ideologue, ogue ogue ogue. Won’t be taken seriously by…other types of demagogues and ideologues. Approved demagoguery and ideology. Official demagoguery and ideology. Limit the debate to a narrow band and pretend the range is wide and open to diverse opinions. I’ll call the large media companies who have political connections. They’re great at this. We can turn MM into the second coming!

  22. Gravatar of B. H. Soetoro B. H. Soetoro
    8. May 2013 at 10:39

    Scott

    For every scenario where currency debasement has led to triumph, I’ll show you 3 where currency debasement has led to economic collapse.

    You start.

  23. Gravatar of Geoff Geoff
    8. May 2013 at 10:48

    B.H. Soetero:

    Silly man, none of those failed attempts tried the new God, Lord and Savior NGDP.

    Those prior failures are the result of worshiping false idols, like Beelzebub CPI, Satan M3, and Lucifer Dual Mandate.

  24. Gravatar of Nick Rowe Nick Rowe
    8. May 2013 at 10:51

    Scott: in defence of Keynes having a “general” theory, he could say: “Look, my theory can be applied in all 3 cases: liquidity trap; non-liquidity trap short run; long run. You just change the shape of the curves and what you assume is endogenous or exogenous.”

  25. Gravatar of Daniel Daniel
    8. May 2013 at 11:08

    Ah yes, the Internet Austrians (Geoff & co) – who have correctly forecasted 10 out of the last 0 bouts of hyper-inflation.

  26. Gravatar of Geoff Geoff
    8. May 2013 at 11:21

    Daniel:

    Ah yes, the Internet anti-Austrians (Daniel & Co.), who have incorrectly, for the millionth time, claimed that Austrianism is an empirical prediction school of thought.

    PS I am not an “Austrian”, BTW.

    Anti-inflation, anti-violence, at most these make me libertarian.

    It’s funny to see you write Internet Austrian…on the internet, which means you are an Internet [Inflationist flavor of the month].

    Pot meet kettle.

  27. Gravatar of Daniel Daniel
    8. May 2013 at 12:13

    If you weren’t a total idiot, you’d understand the deeper meaning of the joke.

    Namely

    1) since “austrianism” (or whatever label you prefer) fails to make any testable prediction – it is totally useless (but we already know you’re too stupid to get that whole “falsifiability” thing)

    and

    2) the fact that hyper-inflations are actually very rare and have much more to do with politics than with economics (to the extent to which they can be separated) ought to tell you something (but we already know you’re too stupid to understand what actually happened in the 1930s)

    But hey, who am I to dissuade you from trolololing ? Whatever gives you gratification, man.

  28. Gravatar of W. Peden W. Peden
    8. May 2013 at 12:31

    Daniel,

    I’d say that hyperinflations have more to do with economic theory than anything else: when a central bank ceases to believe that it can control inflation, trouble starts. One of the remarkable things about the German inflation in the 1920s was how the Historical School and Banking School theoretical influence on the central bankers of the late Imperial/Weimar Republic was so strong.

  29. Gravatar of Daniel Daniel
    8. May 2013 at 13:01

    tinyurl.com/d3bhc8v

    Just sayin’

  30. Gravatar of Mike T Mike T
    8. May 2013 at 13:09

    Daniel,

    “If you weren’t a total idiot, you’d understand the deeper meaning of the joke.”
    >> It wasn’t a good joke.

    “since “austrianism” (or whatever label you prefer) fails to make any testable prediction – it is totally useless”
    >> It doesn’t fail at it, but rather rejects the entire premise. It argues that those who do subscribe to the idea that economics is an empirical science where reproducible experiments and testable predictions are possible defy reality and are, therefore, rendered useless in so much as they claim to predict future events and/or manipulate specific outcomes.

  31. Gravatar of Ashok Rao Ashok Rao
    8. May 2013 at 14:07

    Scott you said “Ashok, The key to understanding Keynes is to understand why he thought fiat money was the worst conceivable monetary regime. A one-time devaluation was ok, but continual devaluations meant fiat money.”

    Actually, I feel Keynes aversion to devaluation was more informed by fear of communism than theory. See from the Economic Consequences of the Peace:
    “Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily.” etc.
    “Lenin was certainly right. There is no subtler, no surer, means of overturning the existing basis of society than to debauch the currency. ”

    Again, important to note he was frustrated because WWII overstimulated economy, caused inflation, and his suggested means of financing the war (deferred forced savings where bonds could only be redeemed after war) was overturned in favor tax/deficits/etc. = inflation.

  32. Gravatar of Ashok Rao Ashok Rao
    8. May 2013 at 14:15

    That is I understand his aversion to fiat currency, but think it’s more a “spirit of the times” than any theoretical angst against devaluation.

    Of course, history has shown a president can more effectively devalue on the oh-so-conservative gold standard than a bunch of central bankers can on “empty money”.

  33. Gravatar of W. Peden W. Peden
    8. May 2013 at 22:56

    Mike T,

    I’m sure that the Austrian methodological position is more sophisticated than that, because your inference is from the possibility of getting things occasionally wrong (due to the lack of controlled experiments) to the certainty of never getting predictions consistently right, which is a leap of logic.

    Also, reproducible experiments are not as ubiquitous in science as mid-20th century books on methodology would have you believe.

  34. Gravatar of ssumner ssumner
    9. May 2013 at 04:40

    B.H. I strongly agree.

    Nick, The real issue is whether the General Theory was anything new. How did it improve on the standard macro model of the 1920s? Hicks said the liquidity trap was the key, the rest was restating well known propositions in different language. Friedman agreed, and I agree with both of them.

    Ashok, The quote is from Lenin, but I very much doubt Keynes thought inflation would lead to communism. Bondholders leading the charge for communism?

  35. Gravatar of libertaer libertaer
    9. May 2013 at 06:40

    “libertaer, So why are Germans so opposed to the ECB hitting their 2% inflation target? If they don’t ease, inflation will average 1% over the next few years.”

    There is a claer bias in favor of deflation.

    This is how Germans think or better feel about money: primarily money should not be a medium of exchange but a perfect store of value. If you sell at any moment in time a good or sevice, the value you get in exchange should be perfectly storable in money, till the end of time! If you sold a hair cut in 2005 for 10 euros which is worth at that moment in time 10 bananas, then the same 10 euros should still be able to buy 10 bananas in 2025(or more bananas, deflation is not a problem). Inflation seems only then to be acceptable if you can get a high enough nominal interest rate (on a 100% safe asset!), so that after 20 years 10 euros + x euros in interest can buy you your 10 bananas (or more).

    What is not acceptable for people here is that the nominal interest rate could be below the inflation rate, erasing the purchasing power of the 2005 hair cut. It’s like not being paid the market price for the hair cut you did in 2005. German newspaper even call it confiscation. (I think the Austrians have a whole theory that real interest rates always have to be positive, because nobody would pay for deferring consumption.)

    That’s why low nominal interest rates makes people wish for lower inflation (1% or even 0%) to keep real interest rates zero or positive. The last thing people in Germany want is hot potatoe money. The lower nominal interest rates are, the bleaker NGDP expectations, the more people prefer their money to be a cold potatoe, even a frozen potatoe.

    All this is crazy, for sure. But that’s how most people here feel about money.

  36. Gravatar of Geoff Geoff
    9. May 2013 at 07:02

    Dr. Sumner:

    “I very much doubt Keynes thought inflation would lead to communism”

    I very much doubt you have read Keynes’ “The Economic Consequences of the Peace”, where he wrote:

    “Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. – As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

    “Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

    Count MMs as one of the 999,999.

  37. Gravatar of Geoff Geoff
    9. May 2013 at 07:10

    Daniel:

    “If you weren’t a total idiot, you’d understand the deeper meaning of the joke.”

    Ah, the passive aggressive approach. How mature.

    I notice you tend to get mad when I choose not to play your game of laughing at a bad joke at my own expense.

    “1) since “austrianism” (or whatever label you prefer) fails to make any testable prediction – it is totally useless (but we already know you’re too stupid to get that whole “falsifiability” thing)”

    That’s true of all economic theories. We can’t observe counter-factuals through repeating the same experiment after changing one variable.

    The problem with non-economists such as yourself, is that you believe “science” is only on the side of governmental force. Government increasing its activity is “falsifiable” and hence “scientific”, whereas government decreasing its activity is “unfalsifiable” and “anti-scientific.”

    “2) the fact that hyper-inflations are actually very rare and have much more to do with politics than with economics (to the extent to which they can be separated) ought to tell you something (but we already know you’re too stupid to understand what actually happened in the 1930s)”

    So you admit it has something to do with economics? Is that your passive aggressive way of agreeing with me?

    Inflation that is consistently applied (political force) to prop up an inflated distorted capital structure (economic counter-force), has no other outcome than hyperinflation.

    “But hey, who am I to dissuade you from trolololing ? Whatever gives you gratification, man.”

    You continue to display zero understanding of what a troll actually is. You’re just name calling because you know at some deep level that your arguments are weak and ultimately grounded on nothing but force and obedience.

    Try again. This latest attempt of yours was far too easy to demolish.

  38. Gravatar of Daniel Daniel
    9. May 2013 at 07:17

    Inflation that is consistently applied (political force) to prop up an inflated distorted capital structure (economic counter-force), has no other outcome than hyperinflation.

    Serves me right for arguing with a moron.

  39. Gravatar of Geoff Geoff
    9. May 2013 at 07:26

    Daniel:

    The truth sometimes hurts, doesn’t it? Especially when it requires you to abandon so much of what you have come to believe.

    Name calling just feels so much better on your sensitive psyche.

    Do you miss your mommy?

  40. Gravatar of Daniel Daniel
    9. May 2013 at 07:46

    So far you’ve proven yourself too stupid to understand basic philosophy of science and stubbornly ignorant of history.

    And now you go making claims that there is no other outcome than hyperinflation

    When’s the last time the likes of Denmark (or the UK, or Sweden, or any other reasonably well-governed nation) has experienced that ?

    Oh, never ? But how can that be, since they’ve had Inflation that is consistently applied (political force) to prop up an inflated distorted capital structure since … forever ?

    You truly are too stupid for words.

  41. Gravatar of Geoff Geoff
    9. May 2013 at 08:55

    Daniel:

    “So far you’ve proven yourself too stupid to understand basic philosophy of science and stubbornly ignorant of history.”

    I know far more philosophy of science and history than you do. All you have are insults and evasions. You are not even engaging the arguments being presented. Why? Because you lack the requisite knowledge of the very topics you listed.

    “And now you go making claims that there is no other outcome than hyperinflation”

    Given the assumptions prior. Or did you miss that part?

    “When’s the last time the likes of Denmark (or the UK, or Sweden, or any other reasonably well-governed nation) has experienced that ?”

    Since when did they satisfy the assumptions I have made that ground my conclusion? Oh that’s right, they haven’t.

    Those countries did NOT inflate sufficiently to stave off every single recession (i.e. prop up distorted capital structure), as is required in my argument for it to explain empirical, historical cases.

    “Oh, never ? But how can that be, since they’ve had Inflation that is consistently applied (political force) to prop up an inflated distorted capital structure since … forever ?”

    No, those countries did not inflate enough to continually prop up their respective distorted capital structures. It’s why they have experienced periodic recessions, my name calling immature interlocutor. Their central banks chose retaining their control over the currency and allowing some corrections to occur, than to inflate to whatever degree will continue to prop up the capital structure.

    “You truly are too stupid for words.”

    Just so you know, the more emotional you get, the less likely you will be able to understand economics, or anything else for that matter.

    And also, for your information, continuing to insult me will only tell me I’m on the right track, considering your pedestrian, low quality posting history.

  42. Gravatar of Daniel Daniel
    9. May 2013 at 15:00

    So, in other words – hyperinflation is inevitable, except when it isn’t.

    Also, I just love it when self-labeled “libertarians” talk about “distorted capital structure”. It’s almost as if they don’t actually believe in free markets.

    The irony is delicious (of course, supposing one has the required brainpower to grasp it).

  43. Gravatar of A Sumner-Krugman Proxy War? | Last Men and OverMen A Sumner-Krugman Proxy War? | Last Men and OverMen
    21. February 2017 at 04:01

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