Nick Rowe Seeks a Keynesian Answer to a Question about Consumption, Investment, and the Government

      Here is the question he poises:

      "And there are two different questions we could ask about the composition of output:"

1. What is the optimal mix between consumption and investment spending?

2. What is the optimal mix between private and government spending?

     "Those two questions are orthogonal. They are two different dimensions. Consumption/investment is North/South; private/government is East/West. A change in the optimal mix between consumption and investment spending has no obvious implications in either direction for the optimal mix between private and government spending. (Maybe the government has a comparative advantage in investment spending and the private sector a comparative advantage in consumption spending, or maybe it's the other way around.)"

     "Keynes' question was about the first of those two questions, and how a decentralised economy might not get the answer right, and could cause even worse problems as a side-effect of not getting the answer right."

     http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/07/keynes-question-and-the-keynesian-answer.html

      See, I don't know that I agree that Keynes question is about the optimal mix of consumption and investment. I would play devils advocate and ask why it matters at the outset .I consider myself a Keynesian, but for me, the answer is-whatever's necessary to get us full employment and healthy growth. 

      I'm not sure that Keynes necessarily had an optimum level of investing vs. consumption. We could point out that going by empirical history the division is about 80% to 20% in favor of consumption. The advocates of the 'progressive conssumption tax' set as a goal a time where consumption as a percentage drops to 76% and investment rises to 24% 

       http://diaryofarepublicanhater.blogspot.com/2013/04/a-progressive-consumption-tax.html?showComment=1367086392236#c2419579065684256146

        Now as for the division between government and private spending, the answer is-whichever gets us the optimal output and employment, but that you'd imagine that during a recession you'd expect the proportion of government spending as a percentage of output to go up. 

       Daniel Kuehn in response to Nick quoted a crucial passage in Keynes which I do think is vital to understand-today very few do at least among the Neoclassicals. 

        ""AN act of individual saving means — so to speak — a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day’s dinner without stimulating the business of making ready for some future act of consumption. It is not a substitution of future consumption-demand for present consumption-demand, — it is a net diminution of such demand. Moreover, the expectation of future consumption is so largely based on current experience of present consumption that a reduction in the latter is likely to depress the former, with the result that the act of saving will not merely depress the price of consumption-goods and leave the marginal efficiency of existing capital unaffected, but may actually tend to depress the latter also. In this event it may reduce present investment-demand as well as present consumption-demand. "

         http://factsandotherstubbornthings.blogspot.com/2013/07/nick-rowe-on-keynesian-questions.html?showComment=1372890046066#c2708131744872019221

       This point of Keynes is almost universally not understood. Among Neoclassial economists the very idea that present savings won't necessarily be spent in the future.