Who Were the Sea Peoples?

I am trying to make a summary table for teaching macroeconomics. This is simplified, of course, but useful still, I hope: Classical Economics Keynesian Economics Say’s Law Always holds. Only holds when leakages do not exceed injections. Unemployment High unemployment is a structural problem. High unemployment can come from insufficient aggregate demand. Equilibrium Markets equilibrate quickly. Markets may equilibrate slowly. In response to a supply or demand change… A price change will produce a stable equilibrium. The other curve may shift, producing a cascade of changes. In response to a recession… Let the market work things out. The government should engage in stimulus spending. Expectations Market actors' expectations rapidly converge towards a stable equilibrium. One group of market actors' expectations may affect another g...

Here's a way explain the difference between the "classical" market for loanable funds and the "Keynesian" market for loanable funds, and bring home the important difference between market participants moving along a supply or demand curve and their moving the supply or demand curve. We start with a supply and demand diagram for loanable funds, with the equilibrium interest rate at 6%: Now, consumers decide to save more, increasing the supply of loans and dropping the equilibrium interest rate from 6% to 5%: Well done, market! Equilibrium achieved, end of story, right? Well, if all of our ceteris are paribus , yes, that's it. The market clears at 5% and our tale has ended. And that certainly could be what happens! But it doesn't have to be what happens. Firms are manned by human actors who themselves interpret , and based on that interpretation react to , events. What if they interpret that rise in savings as an ominous sign: consumers ...

On my fourth round of teaching macroeconomics, I am really able to tie much of the course together around the theme of "upholders of Say's Law" versus "Keynesians" (with "Keynesians" acting as a synecdoche for "all general glut theorists"). For instance, I was just teaching the chapter of our text on unemployment. When we discussed structural unemployment, I told the class about how the general glut debate initially launched in the wake of the Napoleonic Wars. "The defenders of Say's Law were not idiots: they saw that there were idle resources. But their explanation was that after 20 years of fighting, the European economy was structured around war: it would take time to change factories for making cannons into factories for making sweaters." And then I explained how a similar structural explanation was offered for the recent housing-led downturn. And I noted that the Keynesians needn't deny that these structural imbala...

A reader asked me for the above. I thought I'd drag this up from the comments and make it a top-level post, to prompt commentary. So, here goes: 1) Aggregate demand need not equal aggregate supply. (In an economy with temporally lengthy production process and plans made for the far future, Say's Law holds only under special conditions.) 2) The investment portion of aggregate demand is volatile, and depends upon investor's "animal spirits" more than on "fundamentals." 3) On the other hand, for the consumption portion of aggregate demand, the average, marginal propensity to consume out of income is fairly stable. 4) Thus, when investment plunges, aggregate demand is likely to fall far short of aggregate supply. 5) Producers are likely to adjust to this situation through cutting back on production rather than by making price adjustments, so that the economy spirals down into a recession. As I see it, for someone who wants to intelligently rejec...

"The revolutionary impact of Keynesian Economics on contemporary thought stemmed in the main, we have argued, from Keynes' reversal of the conventional ranking of price and quantity velocities. In the Keynesian model price velocities are not infinite; it is sometimes said that the implications of the model result from the assumption that money wages are 'rigid.' This usage can be misleading. Income-constrained processes result not only when price-level velocity is zero, but whenever it is short of infinite." -- Axel Leijonhufvud, Keynesian Economics and the Economics of Keynes , p. 67 In other words, the classical theory of markets, as we still present it to students today, posits that when faced with a disequilibrium price, the market will make infinitely fast price adjustments, so that no quantity adjustments will ever occur. That, certainly, is a very special theory: in reality, price adjustments can never be infinitely rapid, so there will always be some ...

"The fact that there exists a potential barter bargain of goods for labor services that would be mutually agreeable to producers as a group and labor as a group is irrelevant to the motion of the system. The individual steel producer cannot pay a newly hired worker by handing over to him his physical product (nor will the worker try to feed his family on a ton-and-a-half of cold-rolled sheet a week)." -- Axel Leijonhufvud, Keynesian Economics and the Economics of Keynes , p. 90

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 propensi...

Let's say one admits that a general glut is possible . Furthermore, let's say one believes that prices are unlikely to fall fast enough to work off this problem swiftly, and one resists the idea that "the pain is good for us." Is the only answer government stimulus? Consider the following passage: "Unemployment develops, that is to say, because people want the moon; — men cannot be employed when the object of desire (i.e. money) is something which cannot be produced and the demand for which cannot be readily choked off. There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e. a central bank) under public control." -- J.M. Keynes, The General Theory of Employment, Interest and Money , Chapter 17 This, I think, is not quite right: money can be produced. Under free banking, it is produced by private banks, and their means of production is the careful management of their reser...

OK, I'm going to say upfront: I'm am a neophyte in understanding Keynes. I only truly started trying to comprehend what he has to say when I had to teach the history of economic thought and macroeconomics a couple of years ago.* But I am going to offer my understanding of how Keynes has an equally plausible story of how an economy can be driven further and further from equilibrium as do Mises and Hayek. If my understanding of Keynes is primitive, please forgive me! If we assume, as Keynes does, that the interest rate is moved by liquidity preference, then in response to an increase in liquidity preference, and thus a drop in the price of capital goods, as Jonathan Catalan notes should occur, what will happen? Well, per Keynes, at least as I understand him, this drop in the price of capital goods will further spook the animal spirits of investors, and increase their demand for liquidity yet more. That increased demand for liquidity will drive the price of capital goods yet l...

Murray Rothbard never cared if an argument he offered was sound, but only about whether it seemed to make his opponent look stupid. Consider, for instance, his "reductio" of the Keynesian multiplier: Social Income = Income of (insert name of any person, say the reader) + Income of everyone else. Let us use symbols: Social income = Y Income of the Reader = R Income of everyone else = V We find that V is a completely stable function of Y. Plot the two on coordinates, and we find historical one-to-one correspondence between them. It is a tremendously stable function, far more stable than the “consumption function.” On the other hand, plot R against Y. Here we find, instead of perfect correlation, only the remotest of connections between the fluctuating income of the reader of these lines and the social income. Therefore, this reader’s income is the active, volatile, uncertain element in the social income, while everyone else’s income is passive, stable, determined by ...

About the recent crisis . Note well: if one has the correct understanding of, say, Austrian Business Cycle theory, that the Keynesians were correct about these large questions does not "refute" Austrian theory. The Austrian theory is an ideal type (as is the Keynesian theory) that more or less applies to any real world situation. How much it applies in any particular situation must be determined empirically. In the recent downturn, the Austrian story of capital misallocation certainly played a part -- we clearly had a engorged housing sector! But the collapse of aggregate demand played a larger part. In fact, I am starting to suspect that the best cycle theory is often a combination of the two stories, with the exposure of a badly distorted capital structure leading to a collapse in aggregate demand when it causes a crisis of confidence. And then the best solution is to try to maintain NGDP, a la Scott Sumner, while allowing the misallocations to settle out.

Bloomberg.com explains it for us : "Not so long ago, Sweden could claim world leadership in unmitigated Keynesian economics, with a 90 percent marginal tax rate and a welfare state second to none." And here I thought Keynesianism had to do with boosting aggregate demand during a downturn!