This is for my buddy Tom Brown who thinks that my claim that Macro was born with Keynes's GT was very bold
"As to your assertion that no macro existed before Keynes, that strikes me as a bold statement!! I'm going to look a few things up right now in real time: my first thought is all the stuff I've ever read at Glasner's: about Hawtrey and others that preceded Keynes... and even going WAY back to John Stuart Mill, Say and Marx... OK, let's see what Wikipedia has to say:
http://en.wikipedia.org/wiki/History_of_macroeconomic_thought
"OK, I think you're wrong ... but you're not as wrong as I thought:
"Modern macroeconomics can be said to have begun with Keynes and the publication of his book The General Theory of Employment, Interest and Money in 1936"
"I didn't know that! I knew that book was very influential, but I've never heard that before. Interesting."
. From the first page of Richard Koo's preface to The Holy Grail of Macroeconomics is this quote of Bernanke:
"Not only did the Depression give birth to macroeconomics as a distinct filed but the experience of the 1930s continues to influence macroeconomists beliefs, policy recommendations, and research agendas.
http://www.amazon.com/Holy-Grail-Macroeconomics-Lessons-Recession/dp/0470824948/ref=sr_1_1?s=books&ie=UTF8&qid=1393468997&sr=1-1&keywords=richard+koo+the+holy+grail+of+macroeconomics
Ok, I'll admit that it sounds 'bold' when you talk to people like Sumner, or even Nick Rowe and David Glasner as they are Monetarists who don't want to admit that Keynes invented Macro-though Freidman himself sort of admitted it. Even Bernanke doesn't mention Keynes but the timing is obvious. This is because Monetarism is really a Trojan Horse for Keynesianism. It tried to beat it by joining it-sort of. It acknowledges AD and the business cycle but it still tries to keep the world safe for laissez-faire.
There's been a good deal of debate lately about what Keynesianism means and what Say's Law was. However, I think much of it just confuses the matter. Keynesianism means the need of fiscal policy to get us through demand slumps. Monetarism's promise to conservatives is that it will deliver everything they want by kind of accepting the birth of Macro and sort of being part of it. Yet while other conservative schools-Austrianism, RBC, Supply Siders-don't acknowledge Macro at all-they still insist that Micro is enough-while Monetarism accepts the birth of Macro along with Keynesians, they are on the side of the other conservative schools and seek to 'crush the infamous thing'-as Sumner shows on a daily basis.
P.S. Tom does go on to say this after reading Wiki.
"Mike, I took them at their word: "Modern" macro started with Keynes, but it seems there was some fooling around before that time in trying to explain the business cycle, etc. My history on the subject isn't good, maybe for all practical purposes you are right. If you define it in terms of when the concept of aggregate demand appeared, etc."
"Still, that's interesting to me: I didn't know that Keynes was the first to come up with the concept of aggregate demand. Very interesting"
"As to your assertion that no macro existed before Keynes, that strikes me as a bold statement!! I'm going to look a few things up right now in real time: my first thought is all the stuff I've ever read at Glasner's: about Hawtrey and others that preceded Keynes... and even going WAY back to John Stuart Mill, Say and Marx... OK, let's see what Wikipedia has to say:
http://en.wikipedia.org/wiki/History_of_macroeconomic_thought
"OK, I think you're wrong ... but you're not as wrong as I thought:
"Modern macroeconomics can be said to have begun with Keynes and the publication of his book The General Theory of Employment, Interest and Money in 1936"
"I didn't know that! I knew that book was very influential, but I've never heard that before. Interesting."
http://diaryofarepublicanhater.blogspot.com/2014/02/supply-side-liberals-contradiction-in.html?showComment=1393101817473#c2789954265167226549
. From the first page of Richard Koo's preface to The Holy Grail of Macroeconomics is this quote of Bernanke:
"Not only did the Depression give birth to macroeconomics as a distinct filed but the experience of the 1930s continues to influence macroeconomists beliefs, policy recommendations, and research agendas.
http://www.amazon.com/Holy-Grail-Macroeconomics-Lessons-Recession/dp/0470824948/ref=sr_1_1?s=books&ie=UTF8&qid=1393468997&sr=1-1&keywords=richard+koo+the+holy+grail+of+macroeconomics
Ok, I'll admit that it sounds 'bold' when you talk to people like Sumner, or even Nick Rowe and David Glasner as they are Monetarists who don't want to admit that Keynes invented Macro-though Freidman himself sort of admitted it. Even Bernanke doesn't mention Keynes but the timing is obvious. This is because Monetarism is really a Trojan Horse for Keynesianism. It tried to beat it by joining it-sort of. It acknowledges AD and the business cycle but it still tries to keep the world safe for laissez-faire.
There's been a good deal of debate lately about what Keynesianism means and what Say's Law was. However, I think much of it just confuses the matter. Keynesianism means the need of fiscal policy to get us through demand slumps. Monetarism's promise to conservatives is that it will deliver everything they want by kind of accepting the birth of Macro and sort of being part of it. Yet while other conservative schools-Austrianism, RBC, Supply Siders-don't acknowledge Macro at all-they still insist that Micro is enough-while Monetarism accepts the birth of Macro along with Keynesians, they are on the side of the other conservative schools and seek to 'crush the infamous thing'-as Sumner shows on a daily basis.
P.S. Tom does go on to say this after reading Wiki.
"Mike, I took them at their word: "Modern" macro started with Keynes, but it seems there was some fooling around before that time in trying to explain the business cycle, etc. My history on the subject isn't good, maybe for all practical purposes you are right. If you define it in terms of when the concept of aggregate demand appeared, etc."
"Still, that's interesting to me: I didn't know that Keynes was the first to come up with the concept of aggregate demand. Very interesting"
It's important not to mix up a few things. Keynes didn't invent the idea of the business cycle that was kicking around at the time though was very new. Previous to this economics believed in Say's Law that 'Supply creates its own demand' or that there can be no general glut. This meant that there could be an invidiual market that failed to clear but not in all markets.
Some of these ideas of Keynes were already fermenting in the Cambridge School-from folks like Pigou, et. al-but they actually hatched with Keynes. The idea of a 'general glut' was argued before Keynes-perhaps going back to Maltus' debates with Ricardo. However, Keynes gave ideas like this a real theoretical foundation for the first time. However, the real difference is that with Keynes, methodological individualism is now checked-you can't know the economy simply by examining individuals in isolation.
To oversimplify, I would say that Keynes founded macro as a separate discipline by showing how macro, which deals with aggregates, cannot be just scaled up micro, which deals with individual consumers and firms, owing to fallacies of composition like the paradox of thrift.
ReplyDeleteThis is something that neoclassicals (Keynes called them classicals) still do not accept.
Tom Brown I' have to say Tom HIckey has nailed it here.
ReplyDelete"Even Bernanke doesn't mention Keynes but the timing is obvious."
ReplyDeleteOr perhaps the timing is purely coincidental. The term "macroeconomics" (and in that form) was first used by Ragnar Frisch in his lectures notes in 1933-34:
http://www.rivisteweb.it/doi/10.1428/29096
The word first appeared in print in the form "macro-economic" thanks to Jan Tinbergen in July 1936:
http://www.jstor.org/discover/10.2307/1400721?uid=3739592&uid=2129&uid=2&uid=70&uid=4&uid=3739256&sid=21103606604843
True, this was five months after Keynes published the General Theory. But the General Theory makes no use of the term macroeconomics at all, and Tinbergen's use of the term appears to be completely uninfluenced by Keynes' General Theory.
So the branch of economics that has become known as macroeconomics was already well on its way towards being recognized, with or without Keynes.
Mark you're being a bit literal even for you. The fact that it's not mentioned in General Theory is hardly the point. Keynes doesn't mention GDP in GT either yet his work led to the use of these kinds of Macro indicators.
DeleteThis is not a debate over linguistic etymology. It's about how you look at the economy. I think Tom Hickey put it best. As you didn't read his comment here it is:
"To oversimplify, I would say that Keynes founded macro as a separate discipline by showing how macro, which deals with aggregates, cannot be just scaled up micro, which deals with individual consumers and firms, owing to fallacies of composition like the paradox of thrift."
"This is something that neoclassicals (Keynes called them classicals) still do not accept."
Even Freidman admitted this. I guess you can't as you're goal is to 'drive a stake through its heart.' Or rather this is Sumner's goal and so you automatically internalize it.
Mark are you saying the concept of aggregate demand pre-existed Keynes?
Delete"The fact that it's not mentioned in General Theory is hardly the point. Keynes doesn't mention GDP in GT either yet his work led to the use of these kinds of Macro indicators."
DeleteThe first systematic compilation of national accounts had already been published by Simon Kuznets in 1934 in response to a request by the US Senate, so this is an extraordinary overstatement.
"This is not a debate over linguistic etymology. It's about how you look at the economy."
Yes, but why bother coining the terms "microeconomics" and "macroeconomics", as Frisch did, unless one felt there was already a clearly developed division in how one looks at the economy?
"Even Freidman admitted this."
Friedman's evocation "we are all Keynesians now" was simply the recognition of the fact that the vocabulary of macroeconomics had been heavily influenced by Keynes.
"Mark are you saying the concept of aggregate demand pre-existed Keynes?"
The concept of aggregate demand as distinct from aggregate supply goes at least as far back as the underconsumptionist theories of Thomas Attwood and the Birmingham School in 1815. The idea that price instability was the major cause of business cycles had been argued by Cassel (1922), Robertson (1922), Hawtrey (1923), Keynes (1923) and Pigou (1927). This implicitly suggests that the short run aggregate supply curve is upwardly sloped with respect to prices, rather than being vertical, as had previously been thought.
It's not the recognition of aggregate demand that enables demand side models of the business cycle to exist, it's the recognition that the short run aggregate supply curve is upwardly sloped. Keynes was not the first to think so, he was just the first to explicitly state it.
My point was not that Keynes didn't build on what previous economists had thought but that he explicitly stated things that gave us something new.
DeleteBernanke stated that Macro as a distinct field of study begun in the 30s. You seem to aknolwedge that yourself. If it begun in the 30s and Keynes in the 30s heavily influenced its vocabulary that doesn't seem to leave a lot of time for a non Keynesian Macro to exist.
Again-for the third time-I think Tom Hickey puts it well:
"I would say that Keynes founded macro as a separate discipline by showing how macro, which deals with aggregates, cannot be just scaled up micro, which deals with individual consumers and firms, owing to fallacies of composition like the paradox of thrift."
"My point was not that Keynes didn't build on what previous economists had thought but that he explicitly stated things that gave us something new."
DeleteWell, my point is that there is nothing truly original in Keynes' General Theory other than the concept of the "liquidity trap", and even the phrase "liquidity trap" appears to have been coined by Dennis Robertson in 1940.
"Bernanke stated that Macro as a distinct field of study begun in the 30s. You seem to aknolwedge that yourself."
Yes, a lot of things seemed to coalesce in the 1930s thanks to the Great Depression.
"If it begun in the 30s and Keynes in the 30s heavily influenced its vocabulary that doesn't seem to leave a lot of time for a non Keynesian Macro to exist."
Yes, but that's quite a different thing from saying that "Macro was born with Keynes's GT". Macroeconomics was distinct enough to have been already named as a separate field of economics three years before the General Theory was even published.
Three years is pretty small beer to claim that it was a fully developed filed of its own that keynes added nothing essential to.
DeleteNick Rowe to seems to think he did do something a little more interesting that that"
"t is the demand-side that is new. It is the idea that the demand for goods is a function of the quantity of labour that households are actually able to sell. If households are rationed in the labour market, that will spillover and affect their demand in the output market. Because the amount of labour they are actually able to sell, and hence the income they will earn from wages plus non-wages, depends on demand. Which means that demand depends upon demand. Demand depends on itself. That was new, and interesting."
http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/02/keynes-gt-chapter-3.html
I also see that you again ignored Tom HIckey who I think does the best job in describing what made Keynes different.
Again, you are setting yourself much too easy a task just to show the word Macro existed before Keynes. The argument was never that a coined a word. However, no matter how you want to look at it, Macro was certainly in its infancy.
And, while you keep ignoring Hickey, that was what was really new-the move from methodological individualism, to the realization that you cant just neatly move from individuals to aggregates in the economy-Keynes gave us Macro as a separate filed from Micro where you can't get Macro just by scaling up Micro.
Well Mr Sadowski,
DeleteIf your claim is going to be that there is nothing truly original in Keynes GT, I suppose he would likely agree with you. Keynes was enough of a scientist and intellectually honest not to think he had invented anything. He got his ideas form thinking about things other people had read and discussed and likely just refined them or reformed them. Thats what we all do. He did write them down in an original text however. He plagiarized nothing. Its curious you have such a need to dismiss Keynes' role in our econ history,
why is that?
Who do you think is such an original econ thinker? Friedman? Sumner?
"Three years is pretty small beer to claim that it was a fully developed filed of its own that keynes added nothing essential to."
DeleteI'm not claiming he added nothing. I'm claiming he added the concept of the liquidity trap (which to be technical, is different from the New Keynesian liquidity trap). But other than that, in my opinion he added nothing that was truly new.
"Nick Rowe to seems to think he did do something a little more interesting that that"
In my opinion the main point of Rowe's post is that Keynes' aggregate supply function wasn't really new, which is precisely what I am saying here. Recall Keynes essentially claimed in Chapter 3 of the GT (and this has become *the legend*) that the Classical and the Keynesian aggregate supply functions are different principally because the Classical aggregate supply function is vertical with respect to prices. But since Cassel, Robertson, Hawtrey, Fisher (1925), Pigou, and Keynes himself, had already argued that price instability was the major cause of business cycles, this was in fact not new. Rowe additionally argues that the fact that aggregate demand is dependent on employment makes it new (supposedly it makes demand depend on itself). But I'm not even sure that this is new, as for example in The Theory of Interest (1930) Fisher argued that aggregate demand was a function of production and the interest rate, and in turn production was a function of employment, so ultimately aggregate demand was a function of employment and the interest rate. So the idea that aggregate demand depended on employment was not really new either.
"I also see that you again ignored Tom HIckey who I think does the best job in describing what made Keynes different."
I already addressed that at February 28, 2014 at 12:39 PM, but feel free to quote him three or four more times if it pleases you.
Greg,
Delete"Who do you think is such an original econ thinker? Friedman? Sumner?"
I think Stephen Williamson's theory that QE causes deflation is pretty original. :)
This comment has been removed by the author.
DeleteI don't think you did. I just reread the comment and maybe its over my head but I certainly didn't see you answer his point that after Keynes Macro is not just seen as being reduced from Micro
DeleteNick says that A/S isn't new but his AD is.
DeleteMark, I think I saw you claim once that Steve Keen was pretty original... or something like that. You even called his work "Keensian" :D
DeleteLooks like Roger Farmer disagrees with Nick about AS: he says there is something new about Keynes' AS:
Deletehttp://worthwhile.typepad.com/worthwhile_canadian_initi/2014/02/keynes-gt-chapter-3.html?cid=6a00d83451688169e201a3fcc986c7970b#comment-6a00d83451688169e201a3fcc986c7970b
Mark, is there someone whom you'd acknowledge to be the world's leading expert on Keynes?
DeleteRobert Skidelsky's work on Keynes is generally considered to be both comprehensive and authoritative. But Skidelsky is a historian rather than an economist so I'm rather skeptical that his work will shed light on Keynes' economics.
DeleteFor insight into Keynes economics you would have to rely on economists, but you can be sure that Keynes is nearly universally reviled by New Classical/RBC and ABCT, and nearly universally glorified by Post Keynesians and MMT/MR. There actually is a middle ground between the two extremes.
"I think Stephen Williamson's theory that QE causes deflation is pretty original. :)"
DeleteMosler has been saying that for quite a while actually. Don't now when Williamson started saying it, but Ill bet Mosler would never say he was the first one to say that. He simply points out that as a point of logic, if QE drives rates down then holders of govt bonds will get less income. Less income is usually considered by most people to be deflationary.
The difference being that Mosler isn't an economist, and very few people in policy making positions take him seriously.
DeleteAs for the interest income channel...
1) A lot of that interest income goes to non-U.S. investors, so QE actually results in that income staying the U.S. rather than flowing abroad.
According the Flow of Funds (L.209) there were $11,956.8 billion in Treasury securities outstanding at the end of 2013Q3 of which the Fed held $2,072.3 billion. That leaves $9884.5 billion not held by the Fed. Of that, $5,672.9 billion or about 57.4% were held by foreign and international investors.
2) The marginal propensity to consume (MPC) of domestic Treasury holders is often lower than that of non-holders.
Banks, insurance companies, mutual funds, and other corporations hold $2006.4 billion in Treasuries or about 20.3% of those not held by the Fed. Corporations are already sitting on a very large cash hoard this recovery so contributing more to it would probably be unlikely to add much to aggregate demand (AD).
Approximately $911.4 billion or 9.2% of the Treasuries not held by the Fed are held by individuals. But according to Edward Wolff, as of 2007, approximately 60.6% of all financial securities (which of course includes government bonds) held by individuals were held by those in the top 1% of net worth (i.e. net worth of $8,232,000 or more) with another 37.9% held by the next 9% in net worth (i.e. between $882,000 and $8,232,000 in net worth). That leaves only 1.5% of financial securities held by the bottom 90% in net worth. People with high net worth tend to have a low MPC.
3) The drain on interest income is more than offset by easier financial conditions elsewhere (via equities, credit spreads, etc). According to the Federal Reserve Flow of Funds there was approximately $43,400 billion in debt owed by households, businesses and state and local governments in the United States at the end of 2013Q3. And, as a rule, borrowers usually have a higher MPC than savers.
It's heartening however that a millionaire like Mosler is so concerned about the welfare of other bond coupon clippers like himself.
"The difference being that Mosler isn't an economist, and very few people in policy making positions take him seriously. "
DeleteActually Warren has a degree in economics but he's not an "academic" economist which is a positive.. He's worked as a trader and has actually witnessed central bankers operating rather than hypothesizing like Sumner.
But the fact remains, Mr Williamson did not originate the idea of QE being deflationary ........ care to try again Mr Sadowski?
BTW your #1;
"A lot of that interest income goes to non-U.S. investors, so QE actually results in that income staying the U.S. rather than flowing abroad."
Is absolutely irrelevant. The US holders of the bonds get less income too. The fact that foreign holders get less doesnt mean more for us.... thats absurd
"Actually Warren has a degree in economics but he's not an "academic" economist which is a positive."
DeleteI stand corrected.
"He's worked as a trader and has actually witnessed central bankers operating rather than hypothesizing like Sumner."
How does operating a hedge fund give one the opportunity to actually witness central bankers at work?
"But the fact remains, Mr Williamson did not originate the idea of QE being deflationary ........ care to try again Mr Sadowski?"
Williamson has an actual theory of how QE can cause deflation. (The empirical evidence is stacked against it, but that's another matter.) On the other hand, according to Thomas Palley, MMT has no credible theory of inflation at all:
http://www.thomaspalley.com/?p=393
Mosler may think QE causes deflation but he certainly has no theory of how that comes about.
"BTW your #1; Is absolutely irrelevant. The US holders of the bonds get less income too. The fact that foreign holders get less doesnt mean more for us.... thats absurd"
The vast majority of the income the Fed earns from its T-Bond holdings gets turned over to the Treasury. The Treasury is in the U.S. (as is the Fed).
Nice to know you guys are going to sort this all out. I'm come back when it's settled. :D
ReplyDeleteMike, Nick seems to think that AS was nothing new: Keynes took that from classicals. He thinks the interesting thing is AD:
ReplyDeletehttp://worthwhile.typepad.com/worthwhile_canadian_initi/2014/02/keynes-gt-chapter-3.html
"There is absolutely nothing new on the supply-side in chapter 3 of the General Theory.
It is the demand-side that is new."
He also thinks Keynes blew it by not considering a haircut based economy. :D
DeleteAbsolutely the demand side was new, I don't think that contradicts anything I said.
ReplyDeleteActually I think he corroborates what I said about AD
Delete