Very Naughty, Dr. Murphy!

I wrote: "What I can't figure out how to explain is why there are people saying Keynesianism is all about consumption and takes no account of investment." (Emphasis new.)

I.e., I wrote "Keynesianism is not 100% about consumption and 0% about investment."

Then Murphy wrote a response as if I had written "Keynesians are totally about investment and never think about consumption."

I.e., he wrote "Gene thinks Keynesianism is 0% about consumption and 100% about investment."

Any theory of the business cycle really ought to take both consumption and investment into account, don't you think? Wasn't it Mises who kept stressing that the only point of production is consumption? Should we be criticizing him for his silly "consumption-based" economics?

UPDATE: Two other very naughty bits in Bob's post:

1) He notes that Keynesians sometimes talk about "the paradox of thrift" and "the marginal propensity to consume" as if these show a single-sided focus on consumption throughout Keynesian economics. Well, the paradox of thrift is about an excess of investment over intended investment, so, fail. And the MPC basically just says that people are likely to consume only part of their income. That is kind of the very thing that makes investment possible, ain't it?

2) He then offers a single column of Krugman's, written about a very specific situation, that certainly does focus on consumption. Well, so what? Rightly or wrongly, at that time and place, Krugman thought spurring consumption would be very important. If Ron Paul wrote a piece in 2008 railing against bank bailouts, would it be correct to characterize Austrian Business Cycle Theory as "all about fighting bank bailouts"?

Bob, I think you will get coal in your stocking this Xmas!


  1. There's a very big different between Mises and Keynesianism. Mises believed that, despite falling nominal expenditure towards consumer goods, a greater quantity of consumer goods can be consumed at a lower total cost. By framing it in nominal terms (the MPC, and its relation to the MEC) — sensible if you're particularly worried about sticky prices, or if you think some prices can't adjust to a market clearing level at all (Keynes' theory of wage determination) —, Keynesianism makes investment a direct function of nominal consumer expenditure. A falling MPC leads to a reduction in the scope for investment; this isn't true in the Austrian framework. As a result, consumption takes a central role in Keynesian business cycle theory, because higher consumption helps increase investment. For Austrians, consumption doesn't play such an important role.

    1. "There's a very big different between Mises and Keynesianism."

      Come on, Jonathan, I wasn't saying Mises and Keynes were the same! I was pointing out that Mises also "focuses" on consumption in a sense, in that he sees it as the only point of production.

  2. Gene, what is your goal here? If you are trying to say that one could be a Keynesian economist and not focus on consumption more than investment, then OK I'm fine with that. But I thought you were going further than that, and were wondering how critics of Keynesianism ever got the wacky notion that in practice, many Keynesians do indeed worry more about consumption than investment.

    On the latter point, don't take my word for it. Here is Paul Krugman himself chiding Keynesians for just this. An excerpt:

    What has made it into the public consciousness--including, alas, that of many policy intellectuals who imagine themselves well informed--is a sort of caricature Keynesianism, the hallmark of which is an uncritical acceptance of the idea that reduced consumer spending is always a bad thing. In the United States, where inflation and the budget deficit have receded for the time being, vulgar Keynesianism has recently staged an impressive comeback. The paradox of thrift and the widow's cruse are both major themes in William Greider's latest book...It is perhaps not surprising that the same ideas are echoed by John B. Judis in the New Republic; but when you see the idea that higher savings will actually reduce growth treated seriously in Business Week ("Looking for Growth in All the Wrong Places," Feb. 3), you realize that there is a real cultural phenomenon developing.
    To justify the claim that savings are actually bad for growth (as opposed to the quite different, more reasonable position that they are not as crucial as some would claim), you must convincingly argue that the Fed is impotent--that it cannot, by lowering interest rates, ensure that an increase in desired savings gets translated into higher investment.

    It is not enough to argue that interest rates are only one of several influences on investment....
    No, to make sense of the claim that savings are bad you must argue either that interest rates have no effect on spending (try telling that to the National Association of Homebuilders) or that potential savings are so high compared with investment opportunities that the Fed cannot bring the two in line even at a near-zero interest rate....
    Anyway, this is a moot point, because the people who insist that savings are bad do not think that the Fed is impotent.

    ...and then Krugman goes on to rip on James Galbraith.

    1. But Bob, that is Krugman ripping "vulgar Keynesianism," clearly indicating the *real* Keynesianism is not like that!

      But let me clarify: If someone say, "Keynesians put too much emphasis on consumption," I'll say, "OK, tell me about it," and listen.

      However, if someone says, "Keynes was all about consumption and totally ignored investment," then they are just vulgar anti-Keynesians. And these people exist: some of them comment at your blog!

  3. Just the other day I came across Frank Knight's view of a related question, in Angus Burgin's The Great Persuasion. Knight is quoted as saying (in Risk, Uncertainty, and Profit) that captains of industry "consume in order to produce rather than produce in order to consume, in so far as they do either. The real motive is the desire to excel..."

  4. I completely agree.

    It is no surprise that when George L.S. Shackle wanted to sum up the essence of Keynes' theory (in 1983 for the "Austrian Economics Newsletter" no less!) he focused on investment:

    "His theory of involuntary unemployment is perfectly simple and can be expressed in a paragraph, or in a sentence. If you express it in a sentence, you simply say that enterprise is the launching of resources upon a project whose outcome you do not, and cannot, know. The business of enterprise involves investment, the investing of large amounts of resources--huge sums of money--in things whose outcome you cannot be certain of, which could perfectly well turn into a disaster or a brilliant success.

    The people who do this kind of investing are essentially gamblers and they can lose their nerve. And if they decide to withdraw from trade, they sweep their chips up from the table.
    If they decide it’s too risky, if their nerve gives out and they can’t bring themselves to go on investing, they cease to give employment and that is the explanation."

    “An Interview with G.L.S. Shackle,” The Austrian Economics Newsletter, Spring 1983.


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