The ministry of silly budgets
Philip Larkin was wrong; failure actually does come dramatically indeed. Or so it seems if you look at the failure of the fiscal policies of the Tory cabinet. John Lanchester has a great piece in the new issue of the London Review of Books showing the perverse effects of austerity. Yes the multiplier works, and it is rather large he contends.
As much as the story of the Cameron/Osborne failure [they've promised to reduce the deficit from 4.8% of GDP to 1.9% and delivered after two years a mild hike to 4.9%], or the problems with the 'independent' Office of Budget Responsibility [you have to love the name, it's like they work for the Ministry of Silly Walks] and the additional nuggets on IMF revisionism, there is an interesting take on the history of economic ideas.
Lanchester correctly points out that:
"About thirty years ago, when Keynes was in the depths of economic unfashionability, going up to a group of macroeconomists and trying to start a conversation about the multiplier would have been roughly like going up to a group of astrophysicists and trying to start a conversation about your star sign."Lucas suggested that if you talked about Keynes at a conference people would giggle. Note that Richard Kahn, the one that formalized the multiplier in 1931, one of the few theoretical concepts that has direct economic policy applications and is passible of empirical falsification, did not win the Sveriges Riksbank Prize (known as the Nobel).
Even better, he actually gets a good definition of what would be essential in economics. In his words:
"Richard Feynman was once asked what he would pass on if the whole edifice of modern scientific knowledge had been lost, and all he could give to posterity was a single sentence. What axiom would convey the maximum amount of scientific information in the fewest possible words? His candidate was ‘all things are made of atoms.’ In a similar spirit, if the whole ramshackle structure of contemporary macroeconomics vanished into thin air and the field had to be reconstructed from scratch, the sentence which packs as much of the discipline into the fewest possible words might be ‘governments are not households’ (Italics added)."Mine would be 'demand determines income,' but we are splitting hairs. The orthodox would be either 'markets are efficient' or 'supply creates its own demand.' And here lies a crucial problem. These last two are actually quite well known (Efficient Market Hypothesis and Say's Law), but the heterodox ones are not. Not only we have worse PR, but also when the mainstream fails it is very good at avoiding any blame. In fact, even Lanchester, in an otherwise perceptive discussion, falls into the trap that a good one sentence definition of the field of macroeconomics would be "nobody knows anything." Not true, 'the mainstream knows very little' would be better.
I recall hearing that Schumpeter claimed that Kahn almost deserved co-author status with regards the General Theory. That, I think, would explain why the profession tended to handle him with kid gloves. After all, it wasn't hard to bury Keynes after he was dead. But perhaps not so easy to bury Kahn, unless they were willing to forgo the wait and just chuck him in grave while he was still breathing. Even in neoclassical circles the latter may have been frowned upon.
ReplyDeleteKeynes only thanks two economists in the GT, Kahn and Joan Robinson. And there are two footnotes that show influence of other economists, one on Harrod which suggested a graph, and the other on Sraffa and the concept of own rates of interest. More or less the Circus, which certainly helped move Keynes in the correct direction.
DeleteMaybe. But I can buy Schumpeter's argument to some extent. A good deal (of the good part) of the General Theory can indeed be reduced to the multiplier principle.
DeleteNot all of it, I'll grant. But a great deal of the substance.
By the way, speaking of multipliers, the PK society in Britain published the audio of a talk on estimating the Eurozone multiplier here (it's the first talk):
ReplyDeletehttp://www.postkeynesian.net/keynes.html
Oh, I should add: this approach tries to get around a MAJOR obstacle in the form of globalisation. So far as I can see, almost all empirical studies have been massively flawed that involve trade elasticities of demand (yes! Thirlwall!) because they tend to take supply-side changes in supply chains as if they were caused by income growth and trade elasticities. If you exclude this component then the fiscal multiplier becomes a lot bigger than the Thirlwall crowd allow for.
DeleteSo, another win for MMT, I should think. Not that us upstanding citizens would lower ourselves to such a debate, of course.
For my one sentence I would include:
ReplyDelete"Individuals are not usinesses, and businesses are not individuals." Businesses are at least somewhat enabled to mitigate the deflationary effects of cost accounting to their incomes, but unfortunately.....individuals are not granted the same. And the system and individuals suffer as a result.
"About thirty years ago, when Keynes was in the depths of economic unfashionability, going up to a group of macroeconomists and trying to start a conversation about the multiplier would have been roughly like going up to a group of astrophysicists and trying to start a conversation about your star sign."
ReplyDeleteNah. It would have been more like going up to a bunch of medieval astrologers talking about star signs and trying to start a conversation about those Copernicus, Galileo and Kepler guys and suggesting they were right. Result about the same: Expect the Spanish Inquisition.
Governments are not households but does public spending ever increase private sector growth?
ReplyDeleteIf you do this, if you look at the actual data, it is surprising see: Sydenhams Law of public expenditure and GDP growth
Whether the public spending is for wars, economic intervention or welfare the answer is NO, furthermore the New Deal seems to have been a myth, there was a strong private sector recovery in the USA before the New Deal.
It certainly seems as if increasing spending on non-trading parts of the economy (what households or businesses would call 'overheads') depresses growth.