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Digging up bags of buried fiat money is exactly the same as digging more gold out of a mine. You seem to want to mock Keynes by picking on him as advocating "va

Digging up bags of buried fiat money is exactly the same as digging more gold out of a mine. You seem to want to mock Keynes by picking on him as advocating "valueless work", but what you don't understand is that Keynes picked that example to parody the classical economists who - like you - advocated doing nothing in the face of economic collapse. Digging up money is an obvious waste of time. In suggesting it, Keynes was making fun of people like Andrew Carnegie who advocated letting market forces "liquidate stocks, liquidate farmers, liquidate real estate... [and] purge the rottenness out of the system". Under market forces, deflation would have increased the value of gold, pushing the private sector to increase gold production and bring the economy back into equilibrium by paying people to... dig holes in the ground and produce more money. The point of the parable may be less obvious today since no-one seriously advocates the restoration of the gold standard anymore, but the core insight Keynes had remains as valid today as it was then: when you are in a liquidity trap marked by deflation and insufficient demand, there is a huge free lunch to be had simply by printing money and spending it to direct unemployed labor into productive activities. This brings the economy back into equilibrium and is the reason austerity is welfare reducing. Because you advocate forcing the private sector to undertake a senseless course of painful adjustment that could be avoided simply by printing enough money to avert deflation. And whatever you spent your newly-printed money building would be a net positive, and ideally something with practical economic value driving long-term growth: a high-speed national rail-line, new schools, hospitals, etc. Put more simply, Keynes' point was that the most senseless economic act you can imagine (paying people to dig holes in the ground) was still at worst merely equivalent to what the liquidationists were proposing in the 1930s.

CWuestefeld 15y ago
You and I aren't going to resolve the macro debate here -- there are better minds working on the job, and haven't gotten to the bottom of it. But I wanted to take the opportunity to point out to other readers why they should be skeptical of the Keynesian prescription. First, Keynes oversimplifies the system by assuming that everything is one big commodity. Everything is considered in terms of aggregate demand. The thing is, we don't have an aggregate demand problem in this recession: in aggregate, we're doing fine, and have been for some time. The problem is that we've got over-investment in some areas (like housing), and the need to shed that excess, and redirect it into sectors that have greater demand, is painful in any case. But the government's efforts to prop up housing costs is actually interfering with that process. And putting people to work on infrastructure projects as a stimulus doesn't do anything to help. Keynes's model assumes that demand (again, let me remind you that his terminology is "aggregate demand") is one homogeneous thing. Second, inflation can't be used so effectively as a tool. Milton Friedman demonstrated pretty conclusively that such manipulations can't be effective, except in the very short term. The people aren't stupid, they can see that the government is inflating the currency, and then they take action to protect themselves from the losses that it would engender. The result is that the market will stymie the government's effort to benefit from inflation (not that the market will stop the inflation, but that it will interfere with any good that it might have done). Further, inflation turns out to be a vehicle for redistributing wealth -- in the wrong direction. Before the inflationary pressure is felt, the first ones who get their hands on the new specie will enjoy its full value. And those people are the bankers. Do we want to make the banking sector the beneficiary of all that extra buying power?
- Symmetry 15y ago
  The thing is, though, that there is considerable agreement among economists that there is such a thing as aggregate demand. The Keynesian, Monetarist, and Neo-Classical orthodoxies all acknowledge this as a useful concept though a monetarist will tend to think of AG in terms of (M*V) while a Keynesian will think in terms of (C+I+G+NX). You would have to talk to an Austrian School economist or someone even further from the mainstream to get criticism of aggregate demand as a concept. It's really hard to talk about how we can have low unemployment in 2007 and high unemployment in 2012 without using this, because the overall employment loss is much larger than just the housing sector. And I'm not sure why you think that Milton Friedman was opposed to monetary stimulus in general. In fact, he rather explicitly was calling for monetary stimulus during Japan's crisis in the late 90s[1]. Yes, the fact that investors form expectations means that the Philip's Curve doesn't describe an economy with an active central bank, but this is very different from saying that monetary policy is ineffective. In fact, the idea that monetary policy won't work now is the typically Keynesian position (see "Zero Bound"). [1]http://www.hoover.org/publications/hoover-digest/article/6549 http://www.hoover.org/publications/hoover-digest/article/654...
  - CWuestefeld 15y ago
    there is considerable agreement among economists that there is such a thing as aggregate demand. I don't mean to entirely torpedo the idea. I'm just trying to say that it's not to be treated as gospel: it's just a useful way to conceptualize some problems. (And I may have been stumbling in my explication, since I'm really a professional software engineer, and only an amateur economist.)
- trevelyan 15y ago
  The usual measure of aggregate demand is GDP. The United States is by this measure experiencing fairly weak growth, and so it isn't an open-and-shut case that the country is in a liquidity trap the way Spain and Greece are. If you want me to take a position on the United States - sure - I'll believe the US isn't facing a problem with weak aggregate demand when borrowing rates increase, inflation picks up or unemployment comes down. Right now the American economy looks a lot like the Japanese economy in the 1990s, a flight to safety among investors reflecting a preference for liquid assets over real investment. The most vehement critics of Keynesian models tell us this is wrong, but they've been predicting soaring inflation and spiking interest rates for FOUR of the last FOUR years. And these were also generally the same folk trying to invent a debt crisis at a time when the US was unarguably in a liquidity trap and could essentially borrow for the long-term at zero percent. It is hard to escape the conclusion that right-wingers hate Keynes because they associate his ideas with some vague notion of socialism, and most aren't educated or well-read enough to understand what he is actually saying. I'm not putting you in this category since you clearly state you don't believe the United States is in a liquidity trap and that removes any unambiguous point of contention between you and Keynes as far as I can tell, but I also don't think your critique is necessarily on-topic since you seem to have something against Keynesianism and I can't tell why: Keynes never advocates inflation and doesn't advocate subsidizing bankers. It sounds like you're bothered much more by monetary policy than anything else.

CWuestefeld 15y ago

You and I aren't going to resolve the macro debate here -- there are better minds working on the job, and haven't gotten to the bottom of it. But I wanted to take the opportunity to point out to other readers why they should be skeptical of the Keynesian prescription. First, Keynes oversimplifies the system by assuming that everything is one big commodity. Everything is considered in terms of aggregate demand. The thing is, we don't have an aggregate demand problem in this recession: in aggregate, we're doing fine, and have been for some time. The problem is that we've got over-investment in some areas (like housing), and the need to shed that excess, and redirect it into sectors that have greater demand, is painful in any case. But the government's efforts to prop up housing costs is actually interfering with that process. And putting people to work on infrastructure projects as a stimulus doesn't do anything to help. Keynes's model assumes that demand (again, let me remind you that his terminology is "aggregate demand") is one homogeneous thing. Second, inflation can't be used so effectively as a tool. Milton Friedman demonstrated pretty conclusively that such manipulations can't be effective, except in the very short term. The people aren't stupid, they can see that the government is inflating the currency, and then they take action to protect themselves from the losses that it would engender. The result is that the market will stymie the government's effort to benefit from inflation (not that the market will stop the inflation, but that it will interfere with any good that it might have done). Further, inflation turns out to be a vehicle for redistributing wealth -- in the wrong direction. Before the inflationary pressure is felt, the first ones who get their hands on the new specie will enjoy its full value. And those people are the bankers. Do we want to make the banking sector the beneficiary of all that extra buying power?

Symmetry 15y ago
The thing is, though, that there is considerable agreement among economists that there is such a thing as aggregate demand. The Keynesian, Monetarist, and Neo-Classical orthodoxies all acknowledge this as a useful concept though a monetarist will tend to think of AG in terms of (M*V) while a Keynesian will think in terms of (C+I+G+NX). You would have to talk to an Austrian School economist or someone even further from the mainstream to get criticism of aggregate demand as a concept. It's really hard to talk about how we can have low unemployment in 2007 and high unemployment in 2012 without using this, because the overall employment loss is much larger than just the housing sector. And I'm not sure why you think that Milton Friedman was opposed to monetary stimulus in general. In fact, he rather explicitly was calling for monetary stimulus during Japan's crisis in the late 90s[1]. Yes, the fact that investors form expectations means that the Philip's Curve doesn't describe an economy with an active central bank, but this is very different from saying that monetary policy is ineffective. In fact, the idea that monetary policy won't work now is the typically Keynesian position (see "Zero Bound"). [1]http://www.hoover.org/publications/hoover-digest/article/6549 http://www.hoover.org/publications/hoover-digest/article/654...
- CWuestefeld 15y ago
  there is considerable agreement among economists that there is such a thing as aggregate demand. I don't mean to entirely torpedo the idea. I'm just trying to say that it's not to be treated as gospel: it's just a useful way to conceptualize some problems. (And I may have been stumbling in my explication, since I'm really a professional software engineer, and only an amateur economist.)
trevelyan 15y ago
The usual measure of aggregate demand is GDP. The United States is by this measure experiencing fairly weak growth, and so it isn't an open-and-shut case that the country is in a liquidity trap the way Spain and Greece are. If you want me to take a position on the United States - sure - I'll believe the US isn't facing a problem with weak aggregate demand when borrowing rates increase, inflation picks up or unemployment comes down. Right now the American economy looks a lot like the Japanese economy in the 1990s, a flight to safety among investors reflecting a preference for liquid assets over real investment. The most vehement critics of Keynesian models tell us this is wrong, but they've been predicting soaring inflation and spiking interest rates for FOUR of the last FOUR years. And these were also generally the same folk trying to invent a debt crisis at a time when the US was unarguably in a liquidity trap and could essentially borrow for the long-term at zero percent. It is hard to escape the conclusion that right-wingers hate Keynes because they associate his ideas with some vague notion of socialism, and most aren't educated or well-read enough to understand what he is actually saying. I'm not putting you in this category since you clearly state you don't believe the United States is in a liquidity trap and that removes any unambiguous point of contention between you and Keynes as far as I can tell, but I also don't think your critique is necessarily on-topic since you seem to have something against Keynesianism and I can't tell why: Keynes never advocates inflation and doesn't advocate subsidizing bankers. It sounds like you're bothered much more by monetary policy than anything else.