Skidelsky, Keynes and a Look Back at a Sumner Classic

     Who can forget the time that Sumner got into it with Wren-Lewis and Krugman over a hairsplitting debate about "consumption smoothing" and the definition of savings? Well I can't anyway. It was almost a year ago but for a few weeks Sumner was a man possessed.

     It started as many fights do because Krugman ripped into Robert Lucas' attack on Chrstina Romer's explanation of how the Obama stimulus would work back in 2009. Krugman had voiced shock that Lucas would make such an elementary error. Sumner was aghast at Krugman's
"rudeness." Yet it was Lucas who had referred to Romer as practicing "shlock economics."

     Actually every few months Sumner has another go about this episode. Here was a more recent dust up about Krugman-that Bob Murphy of course jumped into:

    
Here’s Paul Krugman:

Menzie Chinn has some fun pointing out that if the doctrine Heritage was pushing to oppose fiscal stimulus were true — namely, that government borrowing always crowds out an equal amount of private spending — then the fiscal cliff could not be a problem.
. . .
But what Menzie doesn’t mention is that the very same doctrine was propounded by distinguished economists at the University of Chicago — John Cochrane and Gene Fama made exactly the same argument that Brian Riedl was making at Heritage, while Robert Lucas fell into a somewhat different but equally misleading fallacy.
So if you think the fiscal cliff matters, you also, whether you know it or not, believe that a whole school of macroeconomics responded to the greatest economic crisis since the Great Depression with ludicrous conceptual errors, of a kind nobody has had a right to make since 1936 at the latest.

Or perhaps one should take a deep breath, and spend a minute or two recalling that conservatives think the supply-side effects of taxes are very important.
PS. In the post on Lucas that Krugman links to, he quotes Lucas as saying:

If the government builds a bridge, and then the Fed prints up some money to pay the bridge builders, that’s just a monetary policy. We don’t need the bridge to do that. We can print up the same amount of money and buy anything with it. So, the only part of the stimulus package that’s stimulating is the monetary part.
…
But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect.

Since Lucas was my adviser I won’t call this ludicrous, but it is wrong. He’s saying that it has no effect holding M constant, when he should say holding M*V constant. Or it would have no effect if the central bank were targeting inflation, or the Taylor Rule, or whatever. What he’s really saying is it makes no sense to do fiscal stimulus if the monetary authority is targeting some sort of nominal aggregate like M*V. And that if fiscal stimulus works, it’s just a backdoor way of doing monetary stimulus (i.e. more M*V.) That’s all true.

     http://www.themoneyillusion.com/?p=18071

     Look I'm just an interested layman. However, forgetting about velocity does seem a pretty elementary error. Sumner admits this but still Lucas' larger point was right and there's no reason to make much of this smaller point-even if laughably wrong.

    However, the reason for remembering that older fight last January is I'm currently reading Skidelsky's "Keynes: Return of the Master."

     It's a great book all around and sheds a lot of light about the differences between Keynes and today's Neoclassical consensus-one shared by the New Keynesians like Delong and Krugman as well; Krugman is about as skeptical as you get without leaving the reservation. He seems to realize that something more is needed however, it's not clear he can take the plunge.

    One point that struck me though was Keynes view of savings, investment, and consumption. This has a direct bearing on Sumner back in January 2012 who was insiting for weeks that "Saving isn't setting aside money' it's building capital goods."

    "People, I beg you to just stop. All the textbooks say S=I, so I thought people accepted this. I guess they don’t. Let’s start with some basic misconceptions:

    "We are interested in national income and output, not individual accounts. Yes, an individual can save without any change in national investment. You might buy a stock or bond. But in that case someone sold you the stock or bond, so they dis-saved exactly what you saved. THE ACT OF SETTING ASIDE MONEY HAS NOTHING TO DO WITH SAVING. SAVING IS BUILDING CAPITAL GOODS."

      http://www.themoneyillusion.com/?p=12617

      Keynes has a different understanding of savings. The reason why returns to the question of monetary neutrality. What the neoclassical school fails to understand is the importance of money as a store of value. With this in mind, money can be held for reasons other than for planned investment/consumption. It may be liquidity preference.