Wednesday, August 17, 2011

Two Straightforward Questions

Two straightforward questions should be asked of every Keynesian or monetarist (i.e., a monetary rather than a fiscal Keynesian):

1. If you agree that increasing everyone's cash balance by the same amount and somehow making everyone aware that such an increase has occurred makes it impossible to increase aggregate spending (since under such conditions the prices of all goods and services, including factors of productions, will, ceteris paribus, instantaneously adjust upward), then how on earth do you plan to achieve such an effect by increasing cash balances of the select few in the world of ineradicable uncertainty?

2. If you agree that doing the above will falsify economic calculation and effect a redistribution of income from the totality of private property owners to the most immediate recipients of newly created money, and if you claim that these results will trigger a psychological reaction whereby people's time preferences are going to increase (hence making at least some of them willing and able to spend more), then why would you not advocate equipping everyone with his or her own money printing machine, making toilet paper a legal tender, etc., all of which would make "liquidity provision"/"quantitative easing" much easier and more expedient?

Notice that the above questions do not even contest the preposterous view that spending rather than saving and investing is the driving force of the economy.


  1. Regarding 1., I'm not sure where do you see the problem. If there is a money illusion you can increase AD. As long as people won't notice the prices rise, they won't adjust their spending schemes. That is possible in the short-term. You could even say, that growing AD is precisely the process, that makes P rise. Once P grows, AD (defined as a real phenomena) goes down.

    As for 2. - good grief, don't give them more gesselian ideas, they might use them...

  2. But don't they want to achieve it in the long run, i.e., produce a stable rather than a temporary effect? If you believe that having sweet dreams is a good thing, then if you can, say, implant 200 extra of those in the minds of the public only at the expense of exposing it to the immediately following 300 nightmares, which would more than offset the sweetness of what came before them, then what logical reason could you possibly have to bother with this procedure in the first place?

  3. Well, the point is they don't believe that it will cause a problem in the long run, because they don't believe in new misalocation resulting from that.

    Their story is:

    1. We have a depression due to demand problems.
    2. The market will sort it out if it gets a kick-start and optimism among entrepreneurs will be reignited
    3. By the time the increase in AD will start to change into an increase in P and reducing AD, the natural forces of entrepreneurship will already start pulling AD by themselves, so in balance that's not a problem. And if they won't, we need to figure out something more.

    In the world without capital misalocation and with animal spirits dependent on waves of optimism and pessimism the story is consistent. It's an empirical question whether the movement from AD to P will be offset by a "natural" AD increase. That's one of the reasons why in case of a big depression they need to drop the monetary stuff, and go to fiscal.

    Of course for this story to be true they have to assume no misalocation and a Minskyan optimism-pessimism driven theory of entrepreneurship (instead of the anticipation driven Misesian one)

  4. And as a side note: a smart keynesian would say that it is in fact invetment that drives growth, but investment is strongly influenced by consumption due to the fact, that you need to have a return on investment (profit from consumers) to invest. They don't like Prices and Production too much :)