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Source link: http://archive.mises.org/9816/standing-keynesianism-on-its-head/

Standing Keynesianism on Its Head

April 20, 2009 by

The popular version of the Keynesian doctrine, which is championed above all by the labor unions, is simply that a fall in wage rates, in reducing the incomes of wage earners, causes a fall in consumer spending, which allegedly serves to worsen the problem of unemployment. This doctrine can be disposed of fairly simply, before proceeding to the scholarly version of Keynesianism, which is known as the IS-LM doctrine. FULL ARTICLE

{ 16 comments }

Jason Gordon April 20, 2009 at 10:08 am

I am struck by the synergy between wage rate floors and progressive income taxation.

Has there been any scholarship regarding this?

David Ch April 20, 2009 at 10:48 am

‘…….scholarly version of Keynesianism, which is known as the IS-LM doctrine’.

Had to grin at that line – harking back to my early schooling in the Keynesian mould, I recall reading that Sir John Hicks, the architect of this ‘scholarly’ incarnation of the Keynesian framework, himself recanted ISLM decades later with words to the effect that

‘that model is a good deal less popular with me than it once was’.

Which renders all undergraduate macroeconomics textbooks everywhere rather, er, moot.

I have tired to dig up the reference on Google, but jhave thus far drawn a blank – apologies.

Eric April 20, 2009 at 12:29 pm

The beauty of Keynes (or his evil) is that he has been able to create a theory that is so difficult to understand, with so many twists and turns, that it is impossible to fully understand and follow even a refutation such as this.

At least I know that I couldn’t really follow all of this article, yet I feel that the author has probably done a really good job.

I often wonder what professional economists that have advanced degrees in Keynesianism do for a living. If the theory is truly bankrupt, then what are they being paid for?

Are they just really dragon slayers – selling freedom from fear? Are they like the court astrologers who peddled their craft for so long (and still do?) without actually producing anything of value – except perhaps something akin to a tranquilizer pill?

Is this why Obama seems so confident and unworried about his economic policies?

refugee April 20, 2009 at 12:52 pm

“This is the third in a series of articles” – what are the URLs for the other two articles?

REPLY FROM REISMAN

The first article in the series was titled “Falling Prices Are the Antidote to Deflation.” It can be found at http://mises.org/daily/3296.

The second was titled “Economic Recovery Requires Capital Accumulation, Not Government `Stimulus Packages.’” It can be found at http://mises.org/daily/3353.

Frank V. April 20, 2009 at 1:32 pm

The Austrians have nothing to offer because they have no theory of decision making under uncertainty, ignorance, and nonlinear risk.Their theories only hold in a world of certainty,certainty equivalence,or linear risk.There is no difference between the Austrians and Neoclassical schools except a lot of talk. Talk is cheap.

DNA April 20, 2009 at 1:48 pm

Frank V:

Wow, someone learned some big words today. Good boy.

Dick Fox April 20, 2009 at 2:34 pm

Eric,

I couldn’t follow some of it either. I believe it is because Reisman makes some unfounded assumptions in his analysis. He assumes certain things that may not be true. If you take his examples and insert your own choices you get different answers but your choice would be just as valid as Reisman’s. This is not tightly argued.

If you want a tight refutation of Keynes read Hazlitt’s Failure of the New Economics: Analysis of the Keynesian Fallacies.

Geoffrey S. April 20, 2009 at 2:35 pm

Frank V.,

You are fooling with us right?

“Austrians have no theory of decision making under uncertainty, ignorance, and nonlinear risk?”

What about the opening pages of Man, Economy, and State and Human Action where the authors of those works talk about action in an uncertain world? I mean isn’t the action axiom the starting point of where we deduce the rest of economics from?

Human Action Chapter VI. Uncertainty
“The uncertainty of the future is already implied in the very notion of action.”

Am I missing something here?

Dick Fox April 20, 2009 at 2:38 pm

Frank V. has posted here before. He is a troll. Just ignore him.

fundamentalist April 20, 2009 at 2:47 pm

This is powerful stuff!

In essence, Keynes said that the marginal efficiency of capital (mec, or profits) decline with an increase of investment of the same kind. All other things being equal, he was right. But all other things are rarely equal. In a depression wages and prices are falling, and investment is rarely in equipment of the same kind, but rather in longer processes and newer technology. Keynes forgets that the assumption of “all other things being equal” doesn’t hold in a depression.

I think Dr. Reisman’s accounting approach can be wedded to Hayek’s Ricardo Effect for an even more powerful explanation of the natural recovery process from a depression. Falling wages tend to happen to the largest degree in the capital goods industries where the depression is the worst. Wages don’t fall as much in the consumer goods industries, while prices do. The profits squeeze in the consumer goods industries encourages businessmen to purchase labor-saving equipment to offset relatively high labor costs. (This is basic micro econ, too.) The demand for capital equipment wedded to falling wages in the capital equipment sector causes profits to rise in that sector and encourage investment and employment.

Matt April 20, 2009 at 3:20 pm

Eric:
that is the crux of what Keynesian economics has become. When refuted in prinicpal or when Keynesian fails in practice, we are told that they were just missing one piece of the puzzle and if we simply tweak this or add more of that then next time it will be OK. I’m certain that Keynesian theory will be tweaked ad nauseum without ever working properly.

Travis April 20, 2009 at 3:54 pm

In regards to Eric’s question, “I often wonder what professional economists that have advanced degrees in Keynesianism do for a living. If the theory is truly bankrupt, then what are they being paid for?”

The answer is that they write Op-Ed articles for the NY Times i.e. Paul Krugman

Inquisitor April 20, 2009 at 5:35 pm

Ignore Frank. He’s done this before. Starts off with huge proclamations, ends up unable to back anything he says. A troll.

Bruce Koerber April 20, 2009 at 9:51 pm

‘Today’s colleges and universities’ are ‘centers of civilization-destroying intellectual disease’ rather than ‘centers of knowledge and education.’

Materialism undermines ethics and education without ethics is pathological.

Vanmind April 21, 2009 at 11:15 pm

On behalf of the laypersons out there, let me just say: snore.

Econ Guy April 22, 2009 at 2:48 am

Vanmind,

I know it might appear boring at first (I don’t), but you should learn some more about Keynesian economics. It’s crucial to understand Keynesian economics because advocates of big government will always fall back on it when they’re criticized. Plus, it’s really very easy to understand

As Rothbard says: “Keynesian doctrine is, despite its algebraic and geometric jargon, breathtakingly simple at its core: recessions are caused by underspending in the economy, inflation is caused by overspending.” Very simple.

Keynes recommended the government spend money during periods of recession (underspending) and decrease spending during periods of inflation (overspending). So every time you hear Ben Stein or some other so called economist calling for increases in government spending during a recession, ask them this?

What about inflationary recession (stagflation)? Rothbard: “What can Keynesianism say? Step on both accelerator and brake at the same time? The stark fact of inflationary recession violates the fundamental assumptions of Keynesian theory and the crucial program of Keynesian policy.” In short, inflationary recession violates the very foundation of Keynesian economics (and IS-LM). So there you have it.

If you really want to learn about Keynesian economics, the easiest way is to listen to Roger Garrison’s lecture here on the Mises website: http://media.mises.org/mp3/MU2007/19-Garrison.mp3

Follow along with these slides: http://www.auburn.edu/~garriro/lvmi.htm

In one hour you’ll walk away with a better understanding of Keynesian economics than most undergraduate economics majors.

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