Keynes understood, why can’t New Keynesians?

I’ve often argued that prices and output are the wrong variables for macroeconomic analysis. Instead we should use nominal GDP as the nominal variable, and employment as the real variable. When sticky wages are added, I call this the musical chairs model. I’ve suggested that there is no “fact of the matter” as to the actual rate of inflation, it’s merely a matter of (bureaucratic) opinion.  Indeed economists have never adequately defined the term ‘inflation’.  Is it the increase in nominal consumption needed to maintain constant utility?  In that case in a world where utility is mostly about “keeping up with the Jones’s,” wage inflation is closer to the truth than price inflation.  And goods are always changing in quality, with new goods appearing all the time.  Since we cannot measure inflation, real output data is also misleading. Only NGDP is the “real thing.”  At best, inflation indices can be used as a very crude tool for estimating economic growth in the long run.  That’s all.

Merijn Knibbe wrote a wonderful post that makes the following observation:

Market monetarists like Scott Sumner totally focus on nominal GDP. And employment. Keynes, of course, totally did the same thing.  .  .  .  much of what Scott Sumner wrote sounds a lot like chapter 4 of the General Theory (sometimes even the style):

(I wish my style was even 10% as good as Keynes’s)

Then he quotes from Keynes:

The three perplexities which most impeded my progress in writing this book, so that I could not express myself conveniently until I had found some solution for them, are: firstly, the choice of the units of quantity appropriate to the problems of the economic system as a whole; secondly, the part played by expectation in economic analysis; and, thirdly, the definition of income.


That the units, in terms of which economists commonly work, are unsatisfactory can be illustrated by the concepts of the National Dividend, the stock of real capital and the general price-level:””

(i) The National Dividend, as defined by Marshall and Professor Pigou, measures the volume of current output or real income and not the value of output or money-income. Furthermore, it depends, in some sense, on net output; “” on the net addition, that is to say, to the resources of the community available for consumption or for retention as capital stock, due to the economic activities and sacrifices of the current period, after allowing for the wastage of the stock of real capital existing at the commencement of the period. On this basis an attempt is made to erect a quantitative science. But it is a grave objection to this definition for such a purpose that the community’s output of goods and services is a non-homogeneous complex which cannot be measured, strictly speaking, except in certain special cases, as for example when all the items of one output are included in the same proportions in another output.

(ii) The difficulty is even greater when, in order to calculate net output, we try to measure the net addition to capital equipment; for we have to find some basis for a quantitative comparison between the new items of equipment produced during the period and the old items which have perished by wastage. In order to arrive at the net National Dividend, Professor Pigou deducts such obsolescence, etc., “as may fairly be called ‘normal’; and the practical test of normality is that the depletion is sufficiently regular to be foreseen, if not in detail, at least in the large.” But, since this deduction is not a deduction in terms of money, he is involved in assuming that there can be a change in physical quantity, although there has been no physical change; i.e. he is covertly introducing changes in value. Moreover, he is unable to devise any satisfactory formula to evaluate new equipment against old when, owing to changes in technique, the two are not identical. I believe that the concept at which Professor Pigou is aiming is the right and appropriate concept for economic analysis. But, until a satisfactory system of units has been adopted, its precise definition is an impossible task. The problem of comparing one real output with another and of then calculating net output by setting off new items of equipment against the wastage of old items presents conundrums which permit, one can confidently say, of no solution.

(iii) Thirdly, the well-known, but unavoidable, element of vagueness which admittedly attends the concept of the general price-level makes this term very unsatisfactory for the purposes of a causal analysis, which ought to be exact.

Nevertheless these difficulties are rightly regarded as “conundrums.” They are “purely theoretical” in the sense that they never perplex, or indeed enter in any way into, business decisions and have no relevance to the causal sequence of economic events, which are clear-cut and determinate in spite of the quantitative indeterminacy of these concepts. It is natural, therefore, to conclude that they not only lack precision but are unnecessary. Obviously our quantitative analysis must be expressed without using any quantitatively vague expressions. And, indeed, as soon as one makes the attempt, it becomes clear, as I hope to show, that one can get on much better without them.

The fact that two incommensurable collections of miscellaneous objects cannot in themselves provide the material for a quantitative analysis need not, of course, prevent us from making approximate statistical comparisons, depending on some broad element of judgment rather than of strict calculation, which may possess significance and validity within certain limits. But the proper place for such things as net real output and the general level of prices lies within the field of historical and statistical description, and their purpose should be to satisfy historical or social curiosity, a purpose for which perfect precision “” such as our causal analysis requires, whether or not our knowledge of the actual values of the relevant quantities is complete or exact “” is neither usual nor necessary. To say that net output to-day is greater, but the price-level lower, than ten years ago or one year ago, is a proposition of a similar character to the statement that Queen Victoria was a better queen but not a happier woman than Queen Elizabeth “” a proposition not without meaning and not without interest, but unsuitable as material for the differential calculus. Our precision will be a mock precision if we try to use such partly vague and non-quantitative concepts as the basis of a quantitative analysis.


On every particular occasion, let it be remembered, an entrepreneur is concerned with decisions as to the scale on which to work a given capital equipment; and when we say that the expectation of an increased demand, i.e. a raising of the aggregate demand function, will lead to an increase in aggregate output, we really mean that the firms, which own the capital equipment, will be induced to associate with it a greater aggregate employment of labour. In the case of an individual firm or industry producing a homogeneous product we can speak legitimately, if we wish, of increases or decreases of output. But when we are aggregating the activities of all firms, we cannot speak accurately except in terms of quantities of employment applied to a given equipment. The concepts of output as a whole and its price-level are not required in this context, since we have no need of an absolute measure of current aggregate output, such as would enable us to compare its amount with the amount which would result from the association of a different capital equipment with a different quantity of employment. When, for purposes of description or rough comparison, we wish to speak of an increase of output, we must rely on the general presumption that the amount of employment associated with a given capital equipment will be a satisfactory index of the amount of resultant output; “” the two being presumed to increase and decrease together, though not in a definite numerical proportion.

In dealing with the theory of employment I propose, therefore, to make use of only two fundamental units of quantity, namely, quantities of money-value and quantities of employment

It is my belief that much unnecessary perplexity can be avoided if we limit ourselves strictly to the two units, money and labour, when we are dealing with the behaviour of the economic system as a whole; reserving the use of units of particular outputs and equipments to the occasions when we are analysing the output of individual firms or industries in isolation; and the use of vague concepts, such as the quantity of output as a whole, the quantity of capital equipment as a whole and the general level of prices, to the occasions when we are attempting some historical comparison which is within certain (perhaps fairly wide) limits avowedly unprecise and approximate.

New Keynesians are certainly not Keynesians.  Neither are old Keynesians, post Keynesians, MMTers, nor anyone else of that ilk.  Market monetarists are the true heirs to Keynes.  Fluctuations in the “money-value” of GDP cause changes in the quantity of employment. Period, end of story.  🙂

PS.  British employment as a share of the population is approaching record levels. What do you think Keynes would make of the modern “Keynesians” who claim Britain is in a deep demand-side depression because measured productivity growth has been poor?  Yup, that’s also my reaction to modern Keynesians.  They don’t seem to know that AD is NGDP, not RGDP.  Never reason from a quantity change.

PPS.  Love the sentence about the 2 queens, and the next one.  Have you ever seen a better description of the foolishness of modern macroeconomics?



42 Responses to “Keynes understood, why can’t New Keynesians?”

  1. Gravatar of Morgan Warstler Morgan Warstler
    28. June 2014 at 06:07

    You and Roger Farmer sitting in a tree….

  2. Gravatar of Dustin Dustin
    28. June 2014 at 08:14

    Very interesting! And if I ever read one of your blog posts in the style of Keynes:

    “The fact that two incommensurable collections of miscellaneous objects cannot in themselves provide the material for a quantitative analysis need not, of course, prevent us from making approximate statistical comparisons, depending on some broad element of judgment rather than of strict calculation, which may possess significance and validity within certain limits.”

    It would require a greater time commitment for me to understand what you are trying to say. That is one hell of s sentence.

  3. Gravatar of benjamin cole benjamin cole
    28. June 2014 at 08:28

    Excellent blogging. A monomaniacal and peevish fixation on inflation—becoming a near-genetic trait of central bankers—must be the result of intellectual inbreeding.

  4. Gravatar of Philo Philo
    28. June 2014 at 08:31

    Keynes wrote: “[W]e [should] limit ourselves strictly to the two units, money and labour, when we are dealing with the behaviour of the economic system as a whole . . . .” I must protest: *utility* (happiness, well-being, welfare, or something of the sort) is our *real* concern, and our *real* standard for evaluating an economic system. At present our conception of utility may be too vague to permit precise measurement, but that means we should work harder to attain a clear, quantifiable conception, not that we should exclude utility from our theorizing.

  5. Gravatar of Major-Freedom Major-Freedom
    28. June 2014 at 08:57

    “Fluctuations in the “money-value” of GDP cause changes in the quantity of employment. Period, end of story. :)”


    Fluctuations in saving and investment, including investment in labor, causes changes in the quantity of money that wage earners are willing and/or able to spend, and thus causes changes in the “money-value” of GDP…

    Wage payments are PRIOR, both temporally and logically, to final output spending.

    Period. End of story. No ifs ands or buts.

  6. Gravatar of Major-Freedom Major-Freedom
    28. June 2014 at 09:01

    In terms of quantity of employment, it is also not true that because wage RATES do not instantly adjust upward or downward, that this somehow suggests after all that the causality goes from final output spending to quantity of labor hours demanded. The causality is still wage payments and labor hours purchased causes quantity of money spent on final output.

  7. Gravatar of Michael Byrnes Michael Byrnes
    28. June 2014 at 09:07

    Fascinating that market monetarists are, in some ways, the heirs to Keynes, Friedman, and Hayek…

  8. Gravatar of Major-Freedom Major-Freedom
    28. June 2014 at 09:10

    Very much like Keynesianism, Market Monetarism suffers from an absence of integrating TIME into its analysis. With Keynes, as with Market Monetarists, all the various types of spending are treated as concurrent and simultaneous.

    Thus, we see claims that final output spending changes cause changes to spending that has already taken place prior, instead of the other way around.

    Oh, but you argue that central banks can control final output changes and thus we can attribute changes to wage payments and quantity of labor demanded to final output spending after all? Nope, you can’t do that. You can’t do that because even there, the central bank isn’t controlling final output spending directly. Inflation primarily takes the form of increased nominal net investment, as the new money leaves the banking system in the form of business loans. Business loans are used to pay wages and factor inputs FIRST, and then once the products are ready for sale, THEN spending on final output takes place.

    Increased NGDP takes place by way of, among other things, wage payments having increased prior.

    Now, of course, this does not mean that 150 million Americans are all working in the exact same stage of this causality at any one time. Some wages are being paid after other businesses have already sold their output, and vice versa.

    What it means is that the collection of separate wage payments is a significant component of the collection of separate expenditures of final output.

    Market monetarism, because it lacks TIME as a core component of its framework, cannot help but make FALSE claims that changes to final spending are somehow the cause for changes to spending that is temporally (and logically) prior.

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. June 2014 at 09:19

    This ought to be a bombshell (but I’m sure that the Krugman/DeLongs will find a way to ignore it);

    ‘[In the UK] the combination of slower trend growth in wages, associated with extremely poor productivity performance, with increased downward pressure from unemployment, means that the economic pain in this recession is felt in terms of falling real wages rather than fewer jobs. Part of the explanation may lie in the fact that the loss of income from unemployment has risen over time, as unemployment benefits – which in the UK are not linked to previous salaries, as they are in most countries – have risen more slowly than wages.

    ‘Meanwhile, administrative pressure on benefit claimants to take low-waged work rather than hold out for a better paid job has steadily increased. This means that workers may be more likely to trade lower wages to keep their jobs now, compared to previous recessions. Moreover, trade unions are far weaker and less prevalent than they were in previous recessions when they were more able to keep wages rising even in the face of low demand. Firms are then using plentiful and relatively cheap workers to meet demand (rather than investing in new machinery etc.), producing the outcomes of falling real wages, poor productivity, and modest increases in unemployment.’

    Textbook, as they say.

  10. Gravatar of Jason Jason
    28. June 2014 at 09:24

    Hi Scott, you said: “Indeed economists have never adequately defined the term ‘inflation’. … And goods are always changing in quality, with new goods appearing all the time.”

    Here is a pretty rigorous definition of inflation: it is the expectation value of the price taken with respect to a large number of markets.

    If the number of individual goods markets is large, the second half of the quoted part of your statement doesn’t matter — changes in quality of a particular good or a new market won’t strongly affect the ensemble average.

  11. Gravatar of Dustin Dustin
    28. June 2014 at 13:11

    Change in quality of a particular good is negligible indeed, though many goods (most goods) change in quality, usual trend is for the better at a given price point, over time. The cumulative effect is quite significant. Ignoring this utility is a subjective approach.

  12. Gravatar of Jason Jason
    28. June 2014 at 20:24


    The approach I used not only assumes ignorance of quality changes, but pleads ignorance on what any particular good even is at all. An economy in that case consists of a random set of widgets. That is to say any economy at any time in history will consist of thousands of products, and the exact composition may not really matter.

    It doesn’t matter that widget 2021 is a better version of widget 82, a worse version or an entirely different product. It doesn’t matter that widget 9945 no longer exists. There is probably some other new widget out there that has similar properties such that the distribution of growth rates of the quantity supplied is broadly similar.

    Also, I’d add that trying to figure out what a consumer’s utility function is for a given product is much like arguing about the subjective qualities of the Queens in the quote at the top of this post.

  13. Gravatar of ChrisA ChrisA
    28. June 2014 at 22:48

    @Patrick, On the UK productivity puzzle, I loved the phrase where they talk about the cost of capital increasing for firms despite lower central bank interest rates. Excellent example of the point that Scott often makes about how low interest rates are a sign if tight money.

    I wonder if a lot of the reason for the UK productivity puzzle is about the increased use of bonuses, these are a lot more prevalent in terms of total wages in the uk as far as I can see, and very often they are hardwired to profits with an upfront formula. I think people would have a very different attitude to their bonus being cut in a recession than their wages.

  14. Gravatar of Edward Edward
    29. June 2014 at 00:19

    Changes in wage payments are part of Gross Domestic Income, which is a more accurate way of measuring… NGDP

  15. Gravatar of W. Peden W. Peden
    29. June 2014 at 01:42

    Patrick R. Sullivan,

    As one UK official said recently, “We realised that we’d made labour markets more flexible, but we didn’t realise HOW much more flexible”.

    Also, just as the textbook model would suggest, the place the UK is still doing badly (given the demand shortfall) is youth unemployment, and this is a secular trend since the mid-noughties, where perhaps coincidentally the minimum wage was extended to young people.

  16. Gravatar of W. Peden W. Peden
    29. June 2014 at 01:43

    * when

  17. Gravatar of ssumner ssumner
    29. June 2014 at 04:19

    Philo, I agree that utility is what matters, but given our current state of knowledge in macro, we need to use proxies like employment.

    Patrick, Good find.

    Jason, I’m afraid the problem of new goods and changing quality is much bigger than you assume.

    W. Peden, Good point.

  18. Gravatar of Dustin Dustin
    29. June 2014 at 04:37

    Simply because you ignore changes in quality does not make it the correct approach. That was the point of both Sumner and Keynes.

  19. Gravatar of Nick Nick
    29. June 2014 at 05:12

    I posted a couple of these Tim Duy a week ago but I thought I’d give it another try in light of this discussion of inflation and Keynes. First, two comments on the FOMC statement last week:

    Prof Duy provides the ‘consensus’ view on the statement as well as a more personal comment.
    And one more for good measure on inflation hysteria:

    I think many Keynesians are on board with prof sumner’s line of criticism on inflation but have an almost genetic political shyness on inflation that I can only imagine is inherited from the carnage of the 70s. If we talk about targeting total nominal labor compensation instead of ngdp, I think the views get even closer.

  20. Gravatar of Steve Steve
    29. June 2014 at 07:29

    B.I.S. is nuts:

    “During the boom, resources were misallocated on a huge scale,” Mr. Caruana said, according to a text of his speech, “and it will take time to move them to new and more productive uses.”

    …as was its warning that the world could be hurtling toward a new crisis.”There is a disappointing element of déjà vu in all this,” Claudio Borio, head of the monetary and economic department at the B.I.S., said…

    “The temptation to postpone adjustment can prove irresistible, especially when times are good and financial booms sprinkle the fairy dust of illusory riches,” the B.I.S. said. “The consequence is a growth model that relies too much on debt, both private and public, and which over time sows the seeds of its own demise.”

  21. Gravatar of Major-Freedom Major-Freedom
    29. June 2014 at 11:51


    “Philo, I agree that utility is what matters, but given our current state of knowledge in macro, we need to use proxies like employment.”

    But that’s just it. There is no rational reason to insist on a macro model when doing so compels people to shoehorn in flawed assumptions like proxies that when taken to their logical conclusions leads even macro economists to doubt what they’re doing. Macro for the sake of macro is a failed approach.

    There is absolutely no need for macro anything in economics. Micro explains 100% of everything that takes place. Total spending? That’s just the abstract sum of all micro level exchanges of money for goods/services. Employment? Same thing.

    We can explain everything using micro, and nothing explained using macro is of any use, or logical consistency.

    Economics is the study of individual action. Macro concepts that are regarded and beliefed to be distinct from micro economics is nothing but the sum total of economic confusions. The only valid macro is that which is accepted to be micro in disguise.

  22. Gravatar of Major-Freedom Major-Freedom
    29. June 2014 at 11:52


  23. Gravatar of Major-Freedom Major-Freedom
    29. June 2014 at 11:57


    Every exenditure is a “component” of some collection of all expenditures.

    Even so, wage payments are not a component of NGDP. NGDP is the sum total of all expenditures on final goods and services, and as such, is “measured” by…adding up all the expenditures on final goods and services.

    Wage payments are logically and temporally prior to final goods and services spending.

  24. Gravatar of ssumner ssumner
    29. June 2014 at 18:19

    Nick, Yes, Tim Duy has been very good.

    Steve, The BIS often has those kinds of comments. Yes, we have a model that relies too much on debt. But what does monetary policy have to do with that?

  25. Gravatar of James in London James in London
    30. June 2014 at 08:21

    Not that much could change in 13 years in terms of productivity, but reading this admirable attempt to measure productivity in four service sector industries across different countries shows that not to be true. It is like reading about a different world. Productivity across countries and over time is harder to measure than inflation, even.
    Retail to e-tail; telephones (remember them?) to skype; bricks and mortar banking to digital; national carriers airlines to budget airlines … to list the four industries covered and just a few of the changes that the authors could not have dreamed of.

  26. Gravatar of Jason Jason
    30. June 2014 at 10:09


    I agree that the approach may not be correct. However it is pretty empirically successful in describing the price level.

    [See the second to last graph]


    If changes in quality and kinds of products do strongly impact the price level, then the quantity theory should much squishier than it is. In fact, it should fail most during periods when growth and inflation are high (products and living standards are changing the most). However, the quantity theory seems (broadly) correct — especially when growth and inflation are high.

    Scott & Dustin,

    You both might be interested in my post “What if money was made of vinegar?’; you are effectively saying this model can’t be correct because it doesn’t incorporate the known behaviors of product change. This is similar to a counter to an approach that used maximum entropy production to describe the water cycle on Earth, obtaining remarkably accurate results for temperatures, cloud cover and winds vs lattitude completely ignoring much of the physics of water. Other climate scientists said that the approach would result in the same outputs if the oceans were made of vinegar, and was therefore wrong. However, what the model is saying is the behavior of water molecules is not important. The behavior of vinegar might be important — if we lived in vinegar world and the maximum entropy approach gave us incorrect results, that would be evidence that the behavior of the molecules matters.

    The point is that ignoring the details of product improvement results in a pretty good description of the price level, therefore the details of product improvement do not seem to matter. (It is not perfect — e.g. one failing is that it doesn’t capture the effect of two narrow inflation spikes in 1973 and 1979, likely due to the oil crises, but that is not a product quality story.)

    This may be related to a Sonnenschein-Mantel-Debreu-like theorem: the only things the aggregate price level inherits are limited properties from the individual prices (i.e. empirical measures of the price level do not restrict quality change assumptions analogously to aggregate demand not restricting rationality assumptions). That is just speculation on my part though 🙂

  27. Gravatar of W. Peden W. Peden
    30. June 2014 at 11:43

    Things are looking good for UK nominal GDP, unless you like inflation targeting-

  28. Gravatar of Edward Edward
    30. June 2014 at 12:08

    “Wage payments are logically and temporally prior to final goods and services spending.

    They are certainly a more accurate thing to measure, if you include them along with corporate profits to measure gross domestic income, but gdi and gdp are the same thing. It’s an identity genius! (Total Spending equals Total Income)

  29. Gravatar of Major-Freedom Major-Freedom
    30. June 2014 at 12:58


    “They are certainly a more accurate thing to measure, if you include them along with corporate profits to measure gross domestic income, but gdi and gdp are the same thing. It’s an identity genius! (Total Spending equals Total Income)”

    That’s an incorrect statement Edward. GDP is not GDI. GDP is the spending on final goods and services only. It does not include wage payments, nor does it include profit income per se. GDP includes all sales revenues.

    Just because you want to “measure” GDP by way of GDI, it does not suddenly mean that GDP is now GDI itself.

    GDP is the output of a country in terms of spending on goods and services, not spending on labor.

    Once again, wage payments are logically and temporally PRIOR to spending on final output.

  30. Gravatar of Jim Caton Jim Caton
    30. June 2014 at 14:51


    Keynes claimed that monetary policy was impotent and that an increase in the money stock only affected the price level at a state of full employment. In his simple model, the P was perfectly inelastic with respect to M as long as the economy was below full employment. He nuanced this elsewhere by breaking up the economy into different sectors, some of which can be operating at full employment while others operate at less-than-full employment. He then applied the claim to each sector. His General Theory is mainly a theory of why fiscal policy is necessary in order to make monetary policy effective in the context of what one might call the labor theory of the price level. You are much more the heir of Hawtrey, who argued with Keynes about this very point.

  31. Gravatar of Michael Byrnes Michael Byrnes
    30. June 2014 at 15:56

    Jim Caton, even as a layperson I think it is fairly obvious that Scott Sumner’s views on macroeconomics are quite different from those of Keynes.

    Doesn’t that just make it all the more remarkable that Keynes understood and articulated one of the key premises on which market monetarism rests?

    Keynes being, after all, Keynes, I find it astounding.

  32. Gravatar of ssumner ssumner
    30. June 2014 at 15:57

    James, Good point,

    Jason, I’d expect just the opposite. The QTM should would better at high rates of inflation. The higher the measured rate of inflation, the smaller the distortions caused by quality changes relative to the overall inflation rate.

    Jim, Yes, I’m much closer to Hawtrey. But unless I’m mistaken Keynes did believe monetary policy was effective at less that full employment. He argued that an increase in the money supply would lower interest rates, which would boost RGDP, until you reached full employment. At that point prices would rise.

  33. Gravatar of Jim Caton Jim Caton
    30. June 2014 at 16:42


    Keynes said a lot of things! You are right.

    He was positing a scenario where investors felt indifferent between holding bonds and dollars for much of what he argued in the General Theory. Given that scenario, monetary policy is unable to impact the interest rate. Of course Hawtrey argued counter to this, stating that an increase in M will increase P, and therefore lead to a rise in nominal rates (You know this part…). An increase in the money stock has a short run – and very limited IMO – impact of lowering real and nominal rates. Keynes should have looked at the long run, which as you have stated before, is not a period of time but a type of effect. Some flavors of Keynesianism that still live on use the arguments that depend on this argument from Keynes, whether or not adherents realize this.


  34. Gravatar of Edward Edward
    30. June 2014 at 20:13

    “The Gross Domestic Income (GDI) is the total income received by all sectors of an economy within a State. It includes the sum of all wages, profits, and taxes, minus subsidies. Since all income is derived from production (including the production of services), the gross domestic income of a country SHOULD EXACTLY EQUAL ITS GROSS DOMESTIC PRODUCT (GDP). The GDP is a very commonly cited statistic measuring the economic activity of countries, and the GDI is quite uncommon.

    In the United States, the Bureau of Economic Analysis produces figures for both the GDP and GDI. Although THESE SHOULD BE EQUAL, since they are calculated in different ways, in practice, the listed figures are different. This difference is known as the statistical discrepancy.[1]”

  35. Gravatar of Morgan Warstler Morgan Warstler
    30. June 2014 at 20:42

    I don’t see much space between Scott and Roger Farmer.

    I’n my reading, I feel like Farmer has the most complete unflinching understanding of Keynes.

    Farmer would have Fed conduct MP by buying and selling stock. I think Scott would LOVE it if the NGDP Futures market was big enough to actually move the needle towards the target, was big enough to be the transmission mechanism. I think it’s easy because I don’t care about Fed losses, if it loses money to SMB owners.

    I think if Farmer had that deal, he’d prefer it even over buying stock.

    Because ultimately the hard relentless 140 beat per minute chest-splitting BASE BEAT of Animal Spirits is not first “investors” or “buyers.’ It is Entrepreneurs. It is Newco, new product sellers.

    I’m pretty sure people get causation wrong on JOLTS quits / hire churn.

    I think it doesn’t matter HOW we increase churn to 6M hires, that will means less than 5.5M fires, and 500K new jobs monthly.

    The thing I WISH economist would say on Piketty is that VC all know: the value of capital is falling as fast as the value of labor.

    Technology is a lever that grows exponential in length, allowing makers to affect ever larger sectors of the economy (higher valuation) needing less money and less labor.

    And SOMEHOW, we have to align our MP and Fiscal policy with this fact.

  36. Gravatar of Jim Caton Jim Caton
    1. July 2014 at 09:39


    I wrote an expanded response as to why I don’t think that market monetarists can lay claim to Keynes’s legacy.

    I’d appreciate any thoughts. I hope that I have not misinterpreted you.


  37. Gravatar of ssumner ssumner
    2. July 2014 at 07:39

    Jim, Your first comment hinged on whether we were at full employment. That’s not the issue. The new one focuses on whether we are at the zero bound. That is the issue.

  38. Gravatar of ssumner ssumner
    2. July 2014 at 07:41

    Jim, Good post. And yes, I’m much closer to Hawtrey.

  39. Gravatar of Jim Caton Jim Caton
    2. July 2014 at 09:02


    Your comment about the zero-bound and full employment help me see this more clearly.

    In Keynes’s argument, the zero-bound and the effect of an increase in M on prices in a condition of less-than-full employment are bound together. If we are at full employment, an expansion of the money stock is unnecessary because AD is not deficient.

    If nominal rates are low – which Keynes argued was the nature of rates in the modern era – then an increase in M will not increase investment and the money will not flow into the labor market. P won’t rise. He does vary the argument slightly by allowing for heterogeneity of rates of return, but the essence of the argument remains.

    I don’t see any way around this, which is why I find any claim to Keynes dubious if that claim is divorced from his views on fiscal policy.

    Thanks for your thoughts.

  40. Gravatar of ssumner ssumner
    3. July 2014 at 07:52

    Jim, Keep in mind that Keynes’ views were always changing. Almost anything one says about Keynes’ views on monetary policy will be true at certain times during his life and false at other times. He went back and forth many times on monetary ineffectiveness. Even after the GT was written.

  41. Gravatar of Jim Caton Jim Caton
    3. July 2014 at 12:42


    I’m concerned with what we define as Keynes’s legacy. The legacy of Keynes has been the GT. And the perspective that I highlight was propounded by Keynes throughout the period. He was certainly more monetarist at the beginning of his career. Denying the effectiveness of monetary policy as he did is certainly not an easy claim to maintain, so one would expect that his views might not always be consistent – He was human. At least… I think he was.

    I don’t expect to convince you, but I believe that Keynes’s legacy survives in his most prominent of work. I also prefer to give Hawtrey and others credit where credit is due concerning their contributions to macroeconomics – which is precisely the theme of the compilation I discussed with you a couple months ago. Much emphasis on Keynes leaves the impression that he contributed more to macro than he actually did, especially when he receives credit for concepts that he contradicts in the GT.

    Thanks for your thoughts and your work!

  42. Gravatar of Major_Freedom Major_Freedom
    6. July 2014 at 08:56


    “In the United States, the Bureau of Economic Analysis produces figures for both the GDP and GDI. Although THESE SHOULD BE EQUAL, since they are calculated in different ways, in practice, the listed figures are different. This difference is known as the statistical discrepancy.”

    This is a theory. It is an estimate. It is not the kind of equality/identity that you suggested earlier.

    That wikipedia entry is misleading and is used to make a false inference. The notion that “…all income is derived from production (including the production of services)” is one thing. Yes, all income is directly or indirectly “derived” from productive activity. But this does not mean you can then say that GDP “should be” equal to GDI. Income earned from labor is not income earned from selling productive output. It is income earned from selling a factor input. Yes, wage earners are engaged in productive activity, but what they are selling is not products, and the income they earn is not product sales revenues, and they do not earn profits or losses.

    Income earned by wage earners is not income earned from production. Labor is a primary input.

    Demand for labor is not demand for output. It’s that simple.

    GDP is not even theoretically equal to GDI. Wage income is not income from selling product.

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