WEBVTT NOTE The Essence of Keynesian Economics: A Critique 1 00:00:00.000 --> 00:00:09.000 I'd like to thank you for attending my talk and I've changed slightly the title of my paper, 2 00:00:09.000 --> 00:00:13.000 which is Essentials of the Keynesian System, Erasmanyan Critique. 3 00:00:13.000 --> 00:00:28.000 So, Erasmanyan, I'd like to explain that my main arguments will be along the work of George Reisman 4 00:00:28.000 --> 00:00:41.100 First things, the principal objectives of the paper explain the continuing influence and 5 00:00:41.100 --> 00:00:49.760 appeal of the Keynesian system despite the well-documented absurdity of its theoretical 6 00:00:49.760 --> 00:00:52.560 substance as well as policy recommendations. 7 00:00:52.560 --> 00:01:06.840 So we still have this very important strong impact of Keynesianism on everything, on academy 8 00:01:06.840 --> 00:01:15.440 and also on the policy, on the actual economic policy. 9 00:01:15.440 --> 00:01:28.280 And my hypothesis is that the critics were not able to identify the most crucial mistakes 10 00:01:28.280 --> 00:01:36.040 in the Keynesian system and that the actual content of the critics' positive economics 11 00:01:36.040 --> 00:01:48.840 was for the most part, even it was in line with the Keynesian system itself. So, for 12 00:01:48.840 --> 00:01:57.320 example, the monetaries and the rational expectations theorists are Keynesians, are Keynesians in 13 00:01:57.320 --> 00:02:04.280 substance for the most part. So, if you take the fundamentals in the analytical system, 14 00:02:04.280 --> 00:02:09.280 and the Keynesian system itself is neoclassical. 15 00:02:09.280 --> 00:02:14.280 So the Keynesian system has roots in neoclassicism. 16 00:02:14.280 --> 00:02:23.280 So Keynes' teacher was Alfred Marshall, and he also took a lot from Fisher. 17 00:02:23.280 --> 00:02:29.280 So if you think about the theory of profit and interest, 18 00:02:29.280 --> 00:02:38.280 So, Keynes' theory was in large part neoclassical. So, his marginal efficiency of capital, for example, is entirely neoclassical. 19 00:02:38.280 --> 00:02:54.280 Although he added something to this body of theory, like with his liquidity preference theory of interest, but the fundamentals were still neoclassicals. 20 00:02:54.280 --> 00:03:22.500 In the paper I present George Riesman's critique of Keynesianism, which is in his book Capitalism, 21 00:03:22.500 --> 00:03:52.000 In Chapter 18, his critique, in my opinion, is very much original. It's apart from everything we knew, even in the Austrian school, so I would very much like to urge you to read his critique very carefully, so it will introduce you, among others, to his contributions to the positive economics. 22 00:03:52.500 --> 00:04:05.500 Like I said, the monetarists and others share important elements in their system with Keynesians. 23 00:04:05.500 --> 00:04:13.500 And the point is that if you have a very big theoretical case for your ideology, like free market, 24 00:04:13.500 --> 00:04:23.060 Market and you will fail eventually because your convictions will remain just articles 25 00:04:23.060 --> 00:04:33.140 of faith and then a case in point is on Greenspan of course so he was a yeah and a very well 26 00:04:33.140 --> 00:04:41.340 known advocate of laissez-faire economics he was even in Arendt's circle but he later 27 00:04:41.340 --> 00:04:54.600 If you don't have a strong theoretical case, then if there are some facts that you cannot 28 00:04:54.600 --> 00:05:03.260 explain with your theory, then you will eventually abandon your ideological convictions, because 29 00:05:03.260 --> 00:05:11.220 everything depends on theory. 30 00:05:11.220 --> 00:05:20.820 In this talk, I just outlined the main objectives of the paper. In this talk, I will just talk 31 00:05:20.820 --> 00:05:28.980 about one thing, one main contradiction, because I don't have much time, so I can spend a lot 32 00:05:28.980 --> 00:05:38.220 of time refuting many absurdities which are to be found in the engine system. But one 33 00:05:38.220 --> 00:05:47.020 One thing which jumps into you is that there is a major contradiction of the 2 plus 2 equals 34 00:05:47.020 --> 00:05:56.180 5 type. So, if we can identify in any theoretical system these kinds of contradictions, then 35 00:05:56.180 --> 00:06:07.060 we will build a very strong case against it. So, in other words, if somebody says A is 36 00:06:07.060 --> 00:06:33.060 If it's not A, then we can dismiss the theory and everything which falls from it, so this is my main objective in this talk, to identify one important element, one fundamental element in the Keynesian system, where I can say it obviously contradicts the law of identity, which is A is A. 37 00:06:33.060 --> 00:06:40.260 Well known iron rents, XCM, developed by iron rents mainly. 38 00:06:40.260 --> 00:06:49.660 So obviously a very detailed critique of the Keynesian system is very important, but since 39 00:06:49.660 --> 00:07:00.620 I cannot give it in this talk, it will then be up to further papers and like I indicated 40 00:07:00.620 --> 00:07:26.340 I will concentrate on the income expenditure model, which is a very specific understanding 41 00:07:26.340 --> 00:07:31.700 of the process of income formation and I will also add use. 42 00:07:31.700 --> 00:07:41.500 So it also provides the foundation for the Overseeing Under-Investment Doctrine and the 43 00:07:41.500 --> 00:07:44.180 line is well known. 44 00:07:44.180 --> 00:07:52.180 It starts with Malthus, Don Hobson and Kane so we have a discontinuity because there is 45 00:07:52.180 --> 00:08:13.220 The income expenditure model can be summed up as a theory that explains why savings do 46 00:08:13.220 --> 00:08:19.860 not equal investment, why there is our saving and under investment. 47 00:08:19.860 --> 00:08:27.220 This is the view, this is the main argument of Malthus, Hobson and Keynes line. 48 00:08:27.220 --> 00:08:40.260 So if we can say that the specific statement of this problem, I mean the problem is that 49 00:08:40.260 --> 00:08:48.780 this statement gets the essence of the actual market process wrong. 50 00:08:48.780 --> 00:09:01.380 So I'd like to refute the proposition that the macroeconomic problem is to equate saving 51 00:09:01.380 --> 00:09:02.380 and investments. 52 00:09:02.380 --> 00:09:06.280 But let's get into the details. 53 00:09:06.280 --> 00:09:09.600 So the importance of the income expenditure model. 54 00:09:09.600 --> 00:09:18.600 Some may say Keynesianism is almost dead even in the terms of theoretical economics. 55 00:09:18.600 --> 00:09:25.000 But still its essence is there. 56 00:09:25.000 --> 00:09:30.880 And Mark Block asked Paul Samuelson about the essence. 57 00:09:30.880 --> 00:09:31.960 What is the essence? 58 00:09:31.960 --> 00:09:39.040 And the essence, like I already mentioned, is that it's the method of analysis which 59 00:09:39.040 --> 00:09:44.960 looks for the balance between propensity to save at full employment and the factors making 60 00:09:44.960 --> 00:09:47.320 for the propensity to invest. 61 00:09:47.320 --> 00:09:52.960 So this is the well-known income expenditure model. 62 00:09:52.960 --> 00:09:58.480 So we have this circular flow of macroeconomic activity. 63 00:09:58.480 --> 00:10:05.780 There are three factors of production, let's say, and then they reduce the final output 64 00:10:05.780 --> 00:10:13.100 and they receive also income in terms of wages, rents, and interest, and they spend their 65 00:10:13.100 --> 00:10:18.740 their money and that way they keep the economy going. 66 00:10:18.740 --> 00:10:29.980 Specifically, their incomes spent on the goods also are used as payments for facts like the 67 00:10:29.980 --> 00:10:37.300 demand for labor stems also from the consumption spending of the consumers. 68 00:10:37.300 --> 00:10:44.780 So there is this direct link between consumption spending and demand for labor, for example, 69 00:10:44.780 --> 00:10:46.580 and demand for capital goods. 70 00:10:46.580 --> 00:10:52.040 Okay, these are the main features of the income expenditure model. 71 00:10:52.040 --> 00:11:00.780 So we have the income, real income, and also the nominal income from the production and 72 00:11:00.780 --> 00:11:12.940 Spending Process in sequence, and then the incomes that people get or the owners of the 73 00:11:12.940 --> 00:11:22.100 factors get, this income can either be spent on consumers' goods or invested, or saved 74 00:11:22.100 --> 00:11:23.540 and invested. 75 00:11:23.540 --> 00:11:32.620 But the important thing is here that both spending categories are sources of funds for the demand 76 00:11:32.620 --> 00:11:38.780 for factors by business. 77 00:11:38.780 --> 00:11:46.940 And in this model, net saving and net investment, which is under I, it provides only the funds 78 00:11:46.940 --> 00:11:50.260 to accumulate additional and new capital. 79 00:11:50.260 --> 00:12:03.240 If you want to keep the economy, to not have the additional accumulation of capital, if 80 00:12:03.240 --> 00:12:10.060 everybody just consumed, we would not have any additional capital. 81 00:12:10.060 --> 00:12:16.680 The consumer spending would maintain the existing capital structure and it would also provide 82 00:12:16.680 --> 00:12:22.520 Why the demand for labor and for capital goods? 83 00:12:22.520 --> 00:12:33.440 And this is the problem here that I refer to as being a contradiction of the law of identity. 84 00:12:33.440 --> 00:12:43.060 John Stuart Mill in the 19th century has this very important in my mind proposition which 85 00:12:43.060 --> 00:12:46.400 is demand for commodities is not demand for labor. 86 00:12:46.400 --> 00:12:55.800 And this proposition goes directly against this whole income expenditure model. 87 00:12:55.800 --> 00:13:05.920 It says that consumers, when they demand consumers, because they don't pay workers, they don't 88 00:13:05.920 --> 00:13:13.800 provide the funds for the demand for capital goods, so they just do the spending. 89 00:13:13.800 --> 00:13:21.720 So let's assume we had a 100% consumption spending out of, we have sales revenues by business 90 00:13:21.720 --> 00:13:28.120 and these sales revenues were spent by both workers and the businessmen capitalists on 91 00:13:28.120 --> 00:13:29.120 the consumption goods. 92 00:13:29.120 --> 00:13:35.860 So in that case we wouldn't have any funds to demand labor and capital goods. 93 00:13:35.860 --> 00:13:47.700 So there is this very important point here that if somebody demands consumer goods or 94 00:13:47.700 --> 00:13:55.220 buys consumer goods, he doesn't create a demand for labor or capital goods. 95 00:13:55.220 --> 00:13:58.300 These demands are separate. 96 00:13:58.300 --> 00:14:09.500 And in most parts also in direct conflict with... I mean, you can either spend for labor or 97 00:14:09.500 --> 00:14:19.580 for consumer goods, for example. So this is a consumer-centered view which places the consumer 98 00:14:19.580 --> 00:14:27.780 and his spending and says that it drives the economy. But actually we have... our economy 99 00:14:27.780 --> 00:14:31.860 must be understood from the business-centered point of view. 100 00:14:31.860 --> 00:14:45.900 So this is how I think we must cast the structure of spending, of different kinds of spending 101 00:14:45.900 --> 00:14:48.140 in the market economy. 102 00:14:48.140 --> 00:14:54.520 So unfortunately I cannot explain very in any detail right now. 103 00:14:54.520 --> 00:15:01.520 So if you're interested, just email me and I will send you the paper which explains this whole idea. 104 00:15:01.520 --> 00:15:17.020 So I know that it's very difficult to explain very clearly the ideas which may appear somewhat strange, 105 00:15:17.020 --> 00:15:47.020 but I just want you to contemplate the Mises preposition and to think about it and if you're interested further, then look at George Riesman's website and read his chapter 18 and then if you're interested in this picture and then how it relates to a better explanation of how the economic system works and functions 106 00:15:47.020 --> 00:15:56.420 And I would like, I mean, I would love to send you the paper and also the explanations of this particular model. 107 00:15:56.420 --> 00:16:05.620 So this is a model which can also be used in the explanation of how profits are determined. 108 00:16:05.620 --> 00:16:11.620 So it's, yeah, it's based on George Schisman's work. 109 00:16:11.620 --> 00:16:14.820 So I think time is up, right? 110 00:16:14.820 --> 00:16:16.820 And I'd like to thank you.