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Krugman on the Great Depression:

Krugman:

But I think it's worth pointing out why Ms. Shlaes thinks the New Deal was destructive of employment: namely, that it raised wages. Funny she should mention that — because the effect of wage changes on employment was the subject of a whole chapter in Keynes's General Theory.

And what Keynes had to say then is as valid as ever: under depression-type conditions, with short-term interest rates near zero, there's no reason to think that lower wages for all workers — as opposed to lower wages for a particular group of workers — would lead to higher employment.

Suppose that wages across the US economy had been, say, 20 percent lower than they actually were. You might be tempted to say that this would make hiring workers more attractive. But to a first approximation, prices would also have been 20 percent lower — so the real wage would not have been reduced. So how would lower wages lead to higher demand for labor?

Well, the real money supply would have been larger — but the normal channel through which this might increase demand, lower interest rates, was blocked by the zero lower bound. Yes, there would have been a slight Pigou effect: real private sector wealth would have been higher, because cash under the mattress (or wherever) was worth more. But on the other hand, real debt burdens would also have been higher, probably exerting a contractionary effect. Overall, there's no good reason to think that lower wages would have helped raise employment.

And once you realize that, the whole argument that FDR prolonged the Depression by sustaining wages evaporates.

I'm no expert on Keynes, but I can't make heads or tails out of what Krugman is saying. My understanding of Shlaes is this: If the government forces wages to rise above market wages, for example by instituting minimum wage laws or encouraging unionization through government intervention (both of which the government did in the 1930s, first through the NIRA and then through the NLRA and FLSA), unemployment will result. Imagine, for example, that the government passed a law tomorrow dictating that as of January 1, everyone with a job will get a 20% raise, but employers are not required to retain any employees. Undoubtedly, some individuals will retain their jobs, but many others will be laid off. If the new wages are thereafter applied to new employees, employers will hire far fewer workers. Let's say the government on January 2 realized it made a big mistake, and restored the status quote ante. Does Krugman really believe that this backtracking would not lead to a "higher demand for labor?"

More generally, Krugman's recent blog posts suggest that he thinks that the New Dealers were operating within some sort of methodical Keynesian framework. In fact, the New Dealers believed all sorts of nonsense: that the U.S. was suffering from "overproduction;" that productivity followed wages, rather than vice versa; and, perniciously, that low-wage industries should be shut down, because these "parasitic" industries employed "defective" workers (often immigrants or African Americans) whose low wages showed that they were not capable of competing in a modern labor market, and were dragging down wages for everyone else.

So, for example, when the NIRA's cotton wage code led to massive unemployment in the industry, the Cotton Code Garment Authority bragged about the reduction of the use of "sweated, underpaid workers" in the garment industry. The Authority said it was necessary "to remove thousands of these substandard workers," who were "replaced by fewer, but far higher paid and more productive wage earners."

With regard to minimum wage laws, as economic historian Bruce Shulman has pointed out,

if the FLSA imperiled any southern jobs, the President and other New Dealers assumed only substandard jobs were at risk and bade them good riddance.... Stable family employment and high family wages mattered more to federal authorities than did the total number employed. One of the perceived evils of low southern wages was that they made a man unable to support his family and force his wife and children to work.

In short, the New Dealers' policies were designed to keep private sector unemployment high, at least in the short term, from a combination of economic ignorance, lack of concern for the short-term fate of the lowest echelon of workers, and political considerations (screwing the "conservative" rural South).

(I have a draft paper coauthored with Tim Leonard of Princeton that touches on some of these issues, but it's not ready to be circulated.)

frankcross (mail):
As I understand it, one Keynes argument is that higher wages will increase consumption, and probably the marginal propensity to consume, so that there will be greater demand for products, requiring more production and associated jobs, and hence prevent the increase in unemployment that would otherwise arise from higher labor costs.

Krugman's argument seems to be that the effect of lower wages in the competitive economy would only be to lower prices. If so, workers are no worse off, but the economy is no better off, and the associated deflation would discourage buying and investments.
12.1.2008 12:25pm
Sasha Volokh (mail) (www):
I'm not sure whether Krugman is right or not, but it is possible to make heads or tails of his argument. He says, toward the top: "lower wages for all workers — as opposed to lower wages for a particular group of workers."

Thus, the intuition for the minimum wage is right: When you raise the minimum wage, you raise the wage of some workers, while leaving the wages of most workers unchanged, then those some workers whose wages have increased become less attractive to hire.

The intuition for encouraging unionization is right: When you encourage unionization, then assuming that wages rise in those unionized industries but not elsewhere, then those unionized workers become less attractive to hire, so (to the extent the employer has the flexibility) he might not want to hire so many of them.

But suppose you, say, doubled all wages all over the economy. You're still not affecting wages abroad, so foreign stuff becomes more attractive... but let's assume that our economy is closed. You can't use these partial equilibrium models anymore, because the prices of goods change too. In other words, the demand curve for labor is basically the revenue marginal product of labor, that is, price x MPL. So if prices go up too because wages to up, then the demand for labor also increases.

If all prices double when wages double, then relative prices are unchanged, so (to a first approximation) there's no effect. (It's essentially just 100% inflation, and inflation does have effects, but it's not the same as the partial-equilibrium wage-employment effects above.)

Krugman says that (to a first approximation) prices change too. I don't know if this is right -- how about capital-intensive goods? But if it's right, then his logic seems to follow. It seems to essentially come down to the idea that a wage change across the board has the effect of changing all prices, so it acts like inflation (or deflation in the case he's talking about).
12.1.2008 12:26pm
TruePath (mail) (www):
I think you are getting confused by the difference between real wages and nominal wages.

The point is that if we doubled the wages of every worker this would also result (in an efficient market) in a doubling of prices as well. Thus the real wages of workers would not increase, i.e., the same amount of labor would be traded for the same amount of goods and services. In other words what really happens if you doubled everyone's wage is that you make the currency half as valuable.

Now you might say not so fast, wages aren't the only way money is used in the economy. You forgot the cost of capital. If you doubled all wages then you increased the cost of wages relative to capital so unemployment should increase since it would be cheaper to replace workers with robots or other infrastructure. In general this would be true but Krugman's point is that when interest rates are at 0 decreased wages can't further decrease the cost of capital. At least this is my (possibly flawed) understanding.

Krugman is not arguing that the people in the New Deal were somehow economically enlightened or the like. He is addressing a specific argument about the effects of a specific policy.
12.1.2008 12:44pm
Art Eclectic:
The problem with discussions about wages is that they always leave out the effect of the number one expense for just about everyone - housing. Apartment rental costs provide a natural indicator of wage expectation. People have to be able to afford a roof over their heads, even if it is a one bedroom in the worst area of town. Housing costs set the floor on wages in a given area.
12.1.2008 12:48pm
FantasiaWHT:
TruePath, the problem with your and Krugman's analysis of the wage/price spiral is that it assumes a rise in wages would instantly create an equal rise in prices. The two (a) don't happen simultaneously, and (b) don't happen at the exact same increase.
12.1.2008 12:48pm
John (mail):
"If all prices double when wages double, then relative prices are unchanged, so (to a first approximation) there's no effect. (It's essentially just 100% inflation, and inflation does have effects, but it's not the same as the partial-equilibrium wage-employment effects above.) "

Sure, nothing changes if you are a wage earner--your buying power is the same and the wage earners will buy the same stuff as before. But a big segment of our population are not wage earners, e.g., retired people, and their buying power is halved. The result will be that fewer goods and services, overall, will be purchased and the economy as a whole must shrink.
12.1.2008 12:51pm
eddiehaskel (mail):
It's not just the cost of housing. It's the cost of health care. The real solution seems to be simple: if the cost of health care payable by employers is what is killing the competitiveness of businesses, then instead of all the ridiculous interference in the all-hallowed market place in favor of the corporate structures and the capital that infests such structures, why not interfere by providing universal health care? But to only fund the "risk takers" who have become to big to fail (have our anti-trust laws also failed to protect us from such nonsense as too big to fail?) and to pay short shrift to the people (and aint this a government of the people, etc.?) seems more than ridiculous. It seems actually un-American!

Of course, I'm just simple folk and not some hoity-toity economist or law professor.
12.1.2008 12:57pm
DavidBernstein (mail):
Sure, nothing changes if you are a wage earner--your buying power is the same and the wage earners will buy the same stuff as before. But a big segment of our population are not wage earners, e.g., retired people, and their buying power is halved. The result will be that fewer goods and services, overall, will be purchased and the economy as a whole must shrink.
That's what I was thinking, in part
12.1.2008 1:05pm
DavidBernstein (mail):
Not to mention that who says that prices are completely correlated with wages? If interest rates are zero, the cost of capital may be low, but it isn't free, you do still have to pay back the money eventually, no?
12.1.2008 1:06pm
DavidBernstein (mail):
And one more thing: where did Shlaes argue that the New Deal, in fact, raised ALL workers' wages, as opposed to those covered by New Deal labor laws? Isn't this a straw man?
12.1.2008 1:09pm
frankcross (mail):
The arguments of Ilya and David seem pretty compelling to me. Krugman seems to be making a theoretical point that rests on flawed factual presumptions. Though I would have some concern for deflationary effects at some point.
12.1.2008 1:14pm
Bart (mail):
Compelling a wage increase will not increase demand.

Let us say that a business has $1 million to pay 20 workers $50,000 apiece. The government compels a 20% raise to $60,000. The business still only has $1 million to pay its workers. There is no magic pot of money and there is no time to wait for a hypothetical increase in demand to pay this mandated raise. Thus, the business can only afford to pay 16 workers at the new wage and needs to lay off 4 workers.

Now lets say that the 20 workers used to produce 100,000 widgets which the company sold for $15 apiece to gross $1.5 million to net a $75,000 profit (5%). Unless the business can use mechanization to make up the lost labor, its production will plunge by 20% and the company can only produce 80,000 widgets. This means that the business needs to raise the price for a widget to about $18.75 to continue to make a profit. However, there are fewer employed workers with money to buy widgets and they may not be willing to pay the increased price - especially if they can buy a cheaper alternative from a country which is not mandating a wage increase. If the business cannot find a market for its higher priced widgets, it goes out of business and 16 more workers are unemployed.

But it gets worse. Under most welfare states, the business and the remaining workers will have to pay higher taxes to support the newly laid off workers through the dole or unemployment insurance. Thus, the economy is still indirectly paying wages to the laid off workers but not realizing any wealth creation from them. This non-beneficial cycle compounds the economic forces driving business out of business.

This is why the New Deal prolonged and deepened the Great Depression into something ahistorical for market corrections.
12.1.2008 1:16pm
CLS (mail) (www):
Krugman says that Keynes point is as valid today as it ever was. Of course, if Keynes' views were wrong then and thus invalid they would still as "valid as ever today".
12.1.2008 1:27pm
Steve Spiller (mail):
I think it would serve you and your readers to review what Amity Shlaes has written on her side of the Krugman/
Shlaes debate.

http://blogs.cfr.org/shlaes/
12.1.2008 1:38pm
A. Zarkov (mail):
"But to a first approximation, prices would also have been 20 percent lower — so the real wage would not have been reduced. So how would lower wages lead to higher demand for labor?"

Because markets are not efficient as Krugman and other economists believe. Nor are the agents rational in setting either prices or wages. Also watch that "to a first approximation," a phrase copied from physics.
12.1.2008 1:39pm
Sasha Volokh (mail) (www):
Many of the points above can be rephrased to make sense within the monetary model:

1. What about capital? I think the explanation of this is something like what TruePath said above: My impression is that these models talk about depression scenarios where the cost of capital is already near 0, so the price of goods is almost all labor. So I think this is what Krugman is saying when he says that when wages double, to a first approximation prices double generally.

2. Fixed-income people. Think of your pension as being a "wage for not working." Or, if you prefer, think of it as the "price of your not working in the future, which corresponded to the premiums you paid in the past." If these aren't indexed, then the idea that all prices increase when wages increase -- or, depending how you're phrasing it, the idea that all wages increase -- is flawed. Of course, this is the case with many pensions, which are only imperfectly indexed, if at all.

3. What about a fixed pot of money to pay wages? Of course, there isn't in generally such a fixed pot of money -- the "wage fund" theory was abandoned in the 19th century. In fact, under perfect capital markets, businesses can always borrow whatever they need to pay wages, provided paying wages is a good investment. So imperfections in capital markets are another way that the model can turn out to be incorrect.
12.1.2008 1:56pm
Anderson (mail):
I think it would serve you and your readers to review what Amity Shlaes has written on her side of the Krugman/
Shlaes debate


I'm interested to see what other economists think about Krugman, but why would I care what some ideologue with an English degree thinks?
12.1.2008 1:57pm
TruePath (mail) (www):
Is the situation in actuality more complicated? Yes, the actual market isn't efficent and stickiness will create other effects etc.. etc..

However, this doesn't in any way show that increases in wages in such a situation increase unemployment. Rather, it shows that more complex models are necessary to answer the question.
12.1.2008 1:57pm
Cody (mail):
Shorter Krugman:

In a depression, slightly lowering the wages of all workers may not raise employment. Therefore any increase in wages - even a very large one, and even one concentrated on low productivity workers - will not lower employment.


The first assertion is probably correct (for reasons which Krugman doesn't really explain well, but are nonetheless true), but the second is ludicrous on its face. It certainly doesn't follow logically, it's not backed up by historical evidence, nor is it anything Keynes argued. Krugman is a very good economist when he wants to be, but sometimes he seems to go out of his way to act clownishly. He even stresses the "all workers" versus "some workers" point, which is the exact reason why his entire argument is non-operative. Sad.
12.1.2008 2:06pm
EIDE_Interface (mail):
Anderson (mail):
I think it would serve you and your readers to review what Amity Shlaes has written on her side of the Krugman/
Shlaes debate

I'm interested to see what other economists think about Krugman, but why would I care what some ideologue with an English degree thinks?


Ah, a self-revealed partisan hack.
12.1.2008 2:10pm
David M. Nieporent (www):
My understanding of Shlaes is this: If the government forces wages to rise above market wages, for example by instituting minimum wage laws or encouraging unionization through government intervention (both of which the government did in the 1930s, first through the NIRA and then through the NLRA and FLSA), unemployment will result.
I agree with many of the critiques of Krugman, but one point: as you probably know, the FLSA had (has) two parts, a minimum wage and an overtime provision. The first part would do what you suggest; the second, though, was designed explicitly to counteract that, by making it cheaper to split up a job among multiple employees rather than paying one person to work longer. It increased underemployment but decreased unemployment.
12.1.2008 2:11pm
Steve:
Of course, there isn't in generally such a fixed pot of money -- the "wage fund" theory was abandoned in the 19th century.

This seems like a very nice way of pointing out that Bart advanced an argument that was virtually childlike. The idea that a company would lay off workers, and only then raise prices to a level where its workers become marginally profitable once more - at which point they mysteriously refuse to rehire the laid-off workers, perhaps solely to make Bart's argument look plausible - has no real-world basis.
12.1.2008 2:15pm
David Warner:
Cody,

"Krugman is a very good economist when he wants to be, but sometimes he seems to go out of his way to act clownishly."

Yeah, it's really sad. As a sometime big fan, I now find myself at times hoping he notices that his bete noires make a practice of regularly breathing, thereby guaranteeing that he would reflexively stop.
12.1.2008 2:31pm
josh:
"My understanding of Shlaes is this: If the government forces wages to rise above market wages, for example by instituting minimum wage laws or encouraging unionization through government intervention (both of which the government did in the 1930s, first through the NIRA and then through the NLRA and FLSA), unemployment will result."

Did unemployment result from the last state or federal raises in the minimum wage? Seems like a fairly easy data point to check out.
12.1.2008 2:34pm
Dilan Esper (mail) (www):
I'm no expert on Keynes, but I can't make heads or tails out of what Krugman is saying. My understanding of Shlaes is this: If the government forces wages to rise above market wages, for example by instituting minimum wage laws or encouraging unionization through government intervention (both of which the government did in the 1930s, first through the NIRA and then through the NLRA and FLSA), unemployment will result.

Not only does this not answer Krugman's point (which is that at close to zero interest rates and negative growth it doesn't work that way), but it's not even true during good economic times, unless the price elasticity of the demand for labor is high, which is sometimes true and often not true.

Look, a lot of the problem here is that plenty of conservative economics claims are based on only the barest notions of supply and demand. It's like they dropped out of the ECON major after taking 101.
12.1.2008 2:53pm
Stacy (mail) (www):
josh: "Did unemployment result from the last state or federal raises in the minimum wage? Seems like a fairly easy data point to check out."

It seems like it, but it isn't. The problem is that, unlike in a nice clean classroom model, there are always 10-50+ different important events going on in the inter/national economy, any one of which - or any combination of some or all of which - could have caused whatever effect you're interested in.

Did instituting a minimum wage in the textile industry increase unemployment? Logically, in the supply and demand model, yes. But there are (hypothetically - I'm not a student of cotton history) other candidates such as:

* Global economic panic slashing international demand. Production and sales both went down - which came first?

* A major trading partner embargoing US cotton in an attempt to protect its own failing cotton industry.

* A weather event (like the dust bowl) that suddenly reduced the supply of cotton, either directly or because cotton fields had to be converted to replace other lost crops.

* etc.

It becomes a chicken-and-egg question, which begs arguments like this one.
12.1.2008 3:09pm
Anderson (mail):
Ah, a self-revealed partisan hack.

... Because I'm interested in the opinions of people who actually are experts in their fields?

If some blowhard on the internet says that Eugene Volokh is an idiot about some point of 1st Amendment law, I'm not going to take that blowhard seriously. If the blowhard is right, then other 1A experts will also notice the problem. If not, then I've saved myself some time and effort.

Btw, the irrelevant Mr. Keynes is to be the subject of a book discussion at Tyler Cowen's blog. Some of y'all should join the commenters at that thread in explaining to Cowen how Amity Shlaes proves that Keynes is not worth discussing. I'm sure he would appreciate your informed opinions.
12.1.2008 3:13pm
davidbernstein (mail):
The disemployment effects of the FLSA were masked by jobs created by the WPA, but, more important, the minimum wage started at 25 cents an hour, to rise to 40 cents in three years. 40 cents would have been devastating, because it was much more than a large percentage of African Americans were earning at the time. But then WWII started, War industries were desperate for manpower, wages rose, and we never found out what would have happened.
12.1.2008 3:16pm
Soronel Haetir (mail):
I thought a lot of the problem with the new deal economic discussion was that FDR wasn't necessarily even trying to pull the country out of the depression, he was pandering to the voters and pleasing enough of them to ensure re-election. If that is the correct model to use rather than economic recovery/power then FDR was an extreme success.
12.1.2008 3:20pm
Dilan Esper (mail) (www):
The disemployment effects of the FLSA were masked by jobs created by the WPA, but, more important, the minimum wage started at 25 cents an hour, to rise to 40 cents in three years. 40 cents would have been devastating, because it was much more than a large percentage of African Americans were earning at the time. But then WWII started, War industries were desperate for manpower, wages rose, and we never found out what would have happened.

That's a strange argument. First, Amity Shlaes doesn't think very much of the WPA either. But if it reduced unemployment and allowed FDR to drive up wages, that makes it sound pretty good, doesn't it?

Second, everyone agrees about the stimulus effect of World War II. But given World War II happened and was far from unforeseeable in the 1930's (I recall some guy named Churchill was raising a big fuss about it), I don't see how the existence of World War II is some great counterargument to a 40 cent an hour minimum wage. You had a country ramping up towards a potential wartime economy, and jacking up the minimum wage to ensure that the coming prosperity was broadly shared. And that's supposed to be bad?

I much prefer libertarians who make straightforward arguments that they find government intervention in the economy to be an unjustified infringement on individual liberty. Because when they start making economic claims, they often go seriously off the track.
12.1.2008 3:26pm
Allan Walstad (mail):

I'm interested to see what other economists think about Krugman, but why would I care what some ideologue with an English degree thinks?

Setting aside the gratuitous dig at Shlaes, there is a good reason to search more widely for perspectives--namely, that there is so much disagreement among economists themselves on fundamental issues, and all the instruments of supposed stabilization and optimization wielded by professional economists have not produced their intended effects.

Did unemployment result from the last state or federal raises in the minimum wage? Seems like a fairly easy data point to check out.

Well, it's a highly contentious issue, although I think the weight of evidence (or at least the weight of published paper) comes down on the side that says increases in the minimum wage cause increases in unemployment. Observationally, the problem lies in sorting out the ceteris paribus. In particular, if minimum wage increases tend to get passed during economic upswings, it will produce a potentially misleading correlation between minimum wages and lower unemployment.
12.1.2008 3:29pm
Allan Walstad (mail):
From an Austrian perspective, the Keynesians want to deal in overly aggregated quantities. The important thing in mmonetarily induced boom/bust cycles is what's happening to the structure of production. Monetary expansion gives a false appearance of profitability to inherently uneconomic investements. The recession is the necessary liquidation of those enterprises, with the associated economic dislocation until a sustainable capital structure is reasserted.

That's why real incomes have to fall, i.e. that's why wages have to fall relative to consumption goods prices. Labor and resources have to be reallocated, and markets can do this efficiently if not hampered. Prices convey the information on which markets rely, and anything that distorts or prevents adjustment of prices--of labor or anything else--will retard the reallocation.

If one could magically divide the denomination of every bill by 10, then of course workers would be making 1/10 the income and prices would go down by a factor of 10. But that's not the issue at hand. If you look at it from the perspective of a firm, as "BART" did earlier, you see that if a firm can pay lower wages it can bring in more workers and make more goods at lower price. [Of course, that only works until unemployment gets pushed down; then, wages are kept up by competition among firms for labor.]
12.1.2008 3:46pm
Alexia:

I much prefer libertarians who make straightforward arguments that they find government intervention in the economy to be an unjustified infringement on individual liberty. Because when they start making economic claims, they often go seriously off the track.


Whatever. But making government jobs and investing in infastructure does nothing to actually produce income, and the free market is always much better at setting wages than the government.

I much prefer liberals who make straightforward arguments that they find government intervention in the economy to be a justified infringement on the most basic rules free markets for human rights reasons. Because when they start making economic claims, they can't help but go seriously off track.

Signed, a libertarian economics minor.
12.1.2008 3:51pm
Anderson (mail):
Setting aside the gratuitous dig at Shlaes

Uh, no -- it isn't gratuitous at all.

The fact that economists disagree isn't an argument for ignoring the economists in favor of what some yahoo thinks.

Lawyers disagree on lots of issues, but I wouldn't resolve a legal disagreement by finding out what Joe the Plumber thinks.
12.1.2008 4:15pm
davidbernstein (mail):
You had a country ramping up towards a potential wartime economy, and jacking up the minimum wage to ensure that the coming prosperity was broadly shared. And that's supposed to be bad?
The FLSA was passed in 1938, and had nothing to do with anticipation of a wartime economy. Nor, given rationing, shortages, et al., could the WWII period be said to be "prosperous." What can be said is that there was not much unemployment, while overall standards of living went down, not least for draftees (not even including their risk of being killed).
12.1.2008 4:15pm
davidbernstein (mail):
And to clarify, the increase to 40 cents was built in to the original bill.

And as for the WPA, there is a difference between "reducing" unemployment and "masking unemployment." Given someone make-work and a government check doesn't reduce unemployment in the long term.
12.1.2008 4:18pm
Malvolio:
there's no reason to think that lower wages for all workers — as opposed to lower wages for a particular group of workers — would lead to higher employment.
Am I to understand that this year's winner of the Nobel in Economics thinks that raising the price of something doesn't reduce the demand for it?

That doesn't sound right. Perhaps he just thinks that (at least the specified zero-interest rate) that the cost of every other factor of production than labor is zero.

No, that doesn't seem right either. The time-value of money might be zero, but there are lots of forms of capital: equipment, land, expertise. They cannot all be valueless.

Perhaps he just think that the increase in the cost of making every single thing will rise in exact proportion to the wages of every single person, so only the nominal prices will rise. No, that's just nonsense. Obviously, different fields command different prices; and different products require different amounts of different types of labor.

So, I'm guess he can only mean that it will all "aggregate" out evenly -- whatever Peter loses in increased prices will be made up by Paul in increased buying power, "overall".

Again, that's just wrong -- although more subtly. So Peter has more money in his pocket, what's he going to do? Let's say he wants a car and in normal times, he can afford either a new Buick or a used Cadillac. He prefers a new Buick so he buys and Paul, the GM worker, builds it.

But then Paul gets a 20% raise and the price of new Buick therefore goes up 10%. Peter will instead buy the used Cadillac (since there's a much lower labor fraction in the used-car "industry" than the new one), and Paul is laid off.

OK, so that's a parable, but you can see how it works: high wages make buyers (and eventually sellers) prefer high-capital, low-labor companies, industries, and technologies, which reduces the demand for labor, and as Calvin Coolidge said, "When a great many people are unable to find work, unemployment results."

Are we all still Keynsians now?
12.1.2008 4:29pm
Anderson (mail):
Given someone make-work

I hope that DB's article has a better grasp of the facts than this tossed-off line would suggest.

The WPA built roads and buildings all across America.
12.1.2008 4:33pm
darrenm:

Suppose that wages across the US economy had been, say, 20 percent lower than they actually were. You might be tempted to say that this would make hiring workers more attractive. But to a first approximation, prices would also have been 20 percent lower — so the real wage would not have been reduced. So how would lower wages lead to higher demand for labor?

So if wages are raised 20 percent higher, then prices will be 20 percent higher? This seems more an argument to just let the market work.
12.1.2008 5:35pm
Brian Macker (mail) (www):
"I'm no expert on Keynes, but I can't make heads or tails out of what Krugman is saying."

That's because both Keynes and Krugman are idiots with high IQs. Happens all the time in nature, and explains why the economy screws up when "the best minds" are trying to run things.

Keynes never met an economic fallacy he didn't like. Likewise Krugman. Read Henry Hazlett's book "The Failure of the New Economics" if you want to understand the babble coming out of Krugman's mouth.

Here are some quotes from Keynes:

"To dig holes in the ground," paid for out of savings, will increase, not only employment, but the real national
dividend of useful goods and services."-Keynes

"I sympathize ... with those who would minimize rather than those who would maximize economic entanglement between nations.... Let goods be homespun whenever it is reasonably and conveniently possible; and above all, let finance be primarily national." - Keynes

"Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better."
"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez faire to dig the notes up again . . . there need be no more unemployment. . . . It would indeed be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing." - John Maynard Keynes
12.1.2008 6:20pm
Brian Macker (mail) (www):
"The point is that if we doubled the wages of every worker this would also result (in an efficient market) in a doubling of prices as well. "



You'd have to double all the cash in everyone's pockets, and bank accounts, double outstanding debts, double all contracts, etc. in order for this to work out properly.

Doubling just wages and prices with the same quantity of money wouldn't work.
12.1.2008 6:25pm
MCM (mail):
Signed, a libertarian economics minor.


wow, i don't know why we bother debating hacks like krugman when we have the true experts right here.
12.1.2008 6:33pm
Dilan Esper (mail) (www):
But making government jobs and investing in infastructure does nothing to actually produce income, and the free market is always much better at setting wages than the government.

That's quite a claim. Unfortunately, economics is a lot more complicated than that.
12.1.2008 6:39pm
Dilan Esper (mail) (www):
The FLSA was passed in 1938, and had nothing to do with anticipation of a wartime economy. Nor, given rationing, shortages, et al., could the WWII period be said to be "prosperous." What can be said is that there was not much unemployment, while overall standards of living went down, not least for draftees (not even including their risk of being killed).

Yeah, Professor Bernstein, but unemployment was precisely the evil that you connected to the FLSA. And FDR and many others in the government certainly knew we were likely to be going to war by 1938 (or at least participating in the war by helping Britain).

So while, no, the FLSA and the 40 cent an hour minimum wage weren't intended specifically to deal with a wartime economy, they were a perfectly good way of ensuring that all those new jobs would be decently paid. Raising minimum wages going into a time of full employment looks like smart economic policy to me. Your real objection is on freedom of contract grounds, not because it really harmed the economy. It didn't.
12.1.2008 6:42pm
David Welker (www):

Setting aside the gratuitous dig at Shlaes, there is a good reason to search more widely for perspectives--namely, that there is so much disagreement among economists themselves on fundamental issues, and all the instruments of supposed stabilization and optimization wielded by professional economists have not produced their intended effects.


Besides, according to Allan Walstead, real economists like Ben Bernanke and Paul Krugman are "quacks". Only physicists understand economics.


From an Austrian perspective...


Yes, but what do the physicists who think real economists are "quacks" think?
12.1.2008 6:48pm
David Welker (www):

If you look at it from the perspective of a firm, as "BART" did earlier, you see that if a firm can pay lower wages it can bring in more workers and make more goods at lower price.


And of course we should listen to Bart rather than Sasha Volokh. Because Sasha Volokh has a Ph.D. in economics and that makes him a "quack." I am sure that Bart is a physicist, like Allan.
12.1.2008 6:51pm
Dilan Esper (mail) (www):
And as for the WPA, there is a difference between "reducing" unemployment and "masking unemployment." Given someone make-work and a government check doesn't reduce unemployment in the long term.

So are the hundreds of thousands of government employees around the country unemployed? How about the thousands of temporary workers employed by governments? Are they unemployed?

Look, you obviously have disdain for the government using infrastructure projects to hire out-of-work laborers during a recession or depression. Hence the epithet "make work". But that doesn't make the jobs any less real-- the workers worked, they were paid, and the projects they completed include many that are still in use 70 years later. By any real definition, they had jobs.

I guess it's easy to think the private sector is always superior when you don't even bother to count the public sector's accomplishments.
12.1.2008 6:55pm
JBL:
It stands to reason that when you increase nominal wages for a certain group of people, the increased dollars have to come from somewhere. There are at least half a dozen possible sources. From other workers through disemployment effects, from other employment benefits (including working conditions), from other areas of the budget (perhaps marketing or R&D), from capital investment, from corporate profits (and hence from wherever the profits would have been spent or reinvested), from consumers through increased productivity (possibly driven by stimulated demand), or from consumers through inflation (with the Fed's assistance). Many options.

Which combination of the above actually occurs will depend on the particulars, and the economy is sufficiently complex that it's almost impossible to isolate specific effects. In this respect I don't think either Shales or Krugman has said anything really convincing.

It is worth noting that maybe one of the above options seems clearly positive in the long run. As to the rest, it depends on whether the initial allocation was efficient and whether the minimum wage effectively addresses the inefficiencies in the market. My sense is that it doesn't, but the question is not reducible to one or two supply/demand graphs. Even the extreme conditions of the Depression don't simplify the equation that far.

It is also worth noting that there are ways to raise wages besides setting a statutory minimum, there are other ways to redistribute wealth, and there are legitimate difficulties in the labor market (changing jobs often has significant transaction costs, unemployment has significant negative externalities, etc.) which the minimum wage does not improve at all. I don't think the minimum wage has been the disaster some people have made it out to be, but I don't think it's made us measurably better off either. Mostly I'm just a bit perplexed at how incomplete most of the arguments are and I think we'd be better off exploring better options.
12.1.2008 6:56pm
David Welker (www):
Anderson,


The WPA built roads and buildings all across America.


Yeah, but that is just "make-work." No self-respecting libertarians would use public roads. =)
12.1.2008 6:56pm
David Welker (www):

Are we all still Keynsians now?


No, just those of us who know anything. Like right-wing economist Greg Mankiw who writes about that subject here.

On the other hand, he expresses some doubts about the limits of Keynesian thinking on his blog today here.

Note the difference between how Mankiw expresses his opinion and how many commenters here express their opinion. Mankiw is actually thoughtful and knows what he is talking about. If only others would follow that same pattern, this could be a much more interesting conversation.
12.1.2008 7:10pm
Paul Allen:

Well, the real money supply would have been larger, but the normal channel through which this might increase demand, lower interest rates, was blocked by the zero lower bound.

Ah, Krugman is confusing real and nominal-rates. In a deflating-price environment, a nominal-rate of 'zero' is actually a positive real-rate, thus there is no 'blockage' at a zero-lower bound.

Second, he begs-the-question when he excludes the wealth-effect out-of-hand.

Third, the general theory is a very dense, convoluted, and at times internally-inconsistent work. Among other things, Keynes eventually concludes in favor of decreasing *real* wages; he does so after scorching the notion of decreasing nominal wages, but in my experience most commentators have not carefully reviewed the general theory--and rely on the work of the Keynesian School rather than Keynes himself. A legion of much more careful men carried the mantle forward long after Keynes was gone.
12.1.2008 7:32pm
LM (mail):

Yeah, but that is just "make-work." No self-respecting libertarians would use public roads.

I wish the WPA built every road and building in southern California. Then when the big earthquake hit, there'd be no real damage.
12.1.2008 8:07pm
Allan Walstad (mail):

Note the difference between how Mankiw expresses his opinion and how many commenters here express their opinion. Mankiw is actually thoughtful and knows what he is talking about. If only others would follow that same pattern, this could be a much more interesting conversation.

Right. Which reminds me, apropos your other posts here tonight and on other occasions, I was wondering when was the last time you had your blood pressure checked. Seriously. All that huffing and puffing can't be a good sign.
12.1.2008 8:15pm
Bart (mail):

Sasha Volokh: What about a fixed pot of money to pay wages? Of course, there isn't in generally such a fixed pot of money -- the "wage fund" theory was abandoned in the 19th century. In fact, under perfect capital markets, businesses can always borrow whatever they need to pay wages, provided paying wages is a good investment. So imperfections in capital markets are another way that the model can turn out to be incorrect.

I am presuming that this is a misinterpretation of my post.

The wage fund theory argued that the total amount of money available to pay wages was a static amount that was based upon the disposable wealth of the rich. In fact, like every other good and service, wages are set by the supply of and demand for a particular type of labor.

In my hypothetical, the annual market wage for a widget worker was $50,000 and the government arbitrarily raised that wage to $60,000. The $1 million available to my widget manufacturer to pay wages is what the market would bear, not a hypothetical static "wage fund" based on the owner's disposable wealth.

The point was that a government dictat to increase wages does not create the profits or loans necessary to pay for that increased labor expense. It would be a foolish lender indeed who would lend money to an business whose labor costs just absorbed its ability to pay back the loan.
12.1.2008 8:16pm
DavidBernstein (mail):
Dilan, here is Gunnar Myrdal, a Socialist, predicting (correctly) the effects of well-above-market minimum wages in the South, once the wartime ended:

As low wages and sub-standard labor conditions are most prevalent in the South, this danger [of unemployment] is mainly restricted to Negro labor in that region. When the jobs are made better, the employer becomes less eager to hire Negroes, and white workers become more eager to take the jobs from the Negroes. There is, in addition, the possibility that the policy of setting minimum standards might cause some jobs to disappear altogether or to become greatly decreased. What has earlier been replaced by mechanization has often been cheap labor. If labor gets more expensive, it is more likely to be economized and substituted for by machines. Also inefficient industries, which have hitherto existed solely by the exploitation of labor, may be put out of business when the government sets minimum standards.
Of course, rather than suffer unemployment from the FLSA and AAA, African Americans moved to Northern cities, which unfortunately also had very high unemployment rates for blacks (around 25%), but at least had some opportunities, political freedom, and a welfare state.
12.1.2008 8:46pm
Paul Allen:

The point was that a government dictat to increase wages does not create the profits or loans necessary to pay for that increased labor expense. It would be a foolish lender indeed who would lend money to an business whose labor costs just absorbed its ability to pay back the loan.

One problem lies in Krugman's conception of intervention against aggregrate wages: it simply is not feasible to move the whole economy at once. There are time-delays. When changes occur following natural processes--such as a gradual shift from price inflation to deflation, people can plan based on expectations. Conversely, intervention is fundamentally erratic--even automatic stabilizers. Policy is the creation of a few individuals and usually involves significant transfers.
12.1.2008 9:02pm
Sasha Volokh (mail) (www):
David Welker: Please don't rely on my Ph.D. for authority! It's true, I do have a Ph.D., but my expertise doesn't particularly include this -- I was just trying to interpret the theory that I think Krugman was using. Now Krugman is the one with both a Ph.D. and a Nobel Prize, which does count for something.

Bart: You have a hypothetical in which the government arbitrarily raised wages from $50k to $60k, but the employer only had $1 million available to pay wages, which is "what the market would bear." I don't understand this.

I do understand that particular wages are what the market would bear, so if you had said "$50k is the wage that the market will bear," I would have understood. There's an actual labor market in which the wage emerges as a price. However, there's no market in which The Total Amount Of Money Paid Out As Wages To Everybody emerges as a price, so I don't know what it means to say that $1 million is what the market would bear.

Now if we stick with "$50k is the wage that the market will bear," then that's still problematic. As I (perhaps imperfectly) understand Krugman to be saying, if all wages are arbitrarily increased by 20% (e.g. $50k to $60k), and if the cost of capital is zero, then prices also increase by 20%, and in the grand new market equilibrium, $60k is now the wage that the market will bear. This is basically (it seems to me) just the same as inflation, and it doesn't need to involve workers losing their jobs.
12.1.2008 9:05pm
Paul Allen:

Now if we stick with "$50k is the wage that the market will bear," then that's still problematic. As I (perhaps imperfectly) understand Krugman to be saying, if all wages are arbitrarily increased by 20% (e.g. $50k to $60k), and if the cost of capital is zero, then prices also increase by 20%, and in the grand new market equilibrium, $60k is now the wage that the market will bear. This is basically (it seems to me) just the same as inflation, and it doesn't need to involve workers losing their jobs.

Only if you expect every employer to act rationally, but suppose that some percentage of capitalists are less capable? This is the core of the von Mises ABCT--just as some capitalists are mislead by interest-rate manipulation, some capitalists will mistake your wage change.

Second, if you could increase (or decrease) wages en mass, immediately, it does not follow that you could change all prices immediately. Consequently, you'd be effecting a disequilibrium. It simply is not obvious that sequence of events that should follow to a uniform change in prices will. In the interim price signals will be distorted by the uncertainty as to whether an observed price incorporates the wage change. Ceteris paribus analysis leads to many very wrong economic theories. The economy is dynamic, therefore distorting price signaling can have unintended consequences.
12.1.2008 9:26pm
Anderson (mail):
Now Krugman is the one with both a Ph.D. and a Nobel Prize, which does count for something.

Or so it would seem to those of us not minoring in economics.

Krugman can certainly be wrong -- all the econ Nobelists can't all be right all the time (see Principle of Noncontradiction) -- but if he's wrong, it's unlikely to be in some stupid fashion. Ditto Keynes. If there's one thing that's evident about the General Theory, it's that it is a difficult work for the non-specialist. That doesn't make it right, but it does make the opinions of specialists about it more interesting than the opinions of, um, people who've read Amity Shlaes about Keynes.
12.1.2008 10:04pm
Malvolio:
As I (perhaps imperfectly) understand Krugman to be saying, if all wages are arbitrarily increased by 20% (e.g. $50k to $60k), and if the cost of capital is zero, then prices also increase by 20%, and in the grand new market equilibrium, $60k is now the wage that the market will bear.
In the completely and totally impossible case that the cost of capital is zero, increasing everyone's salary -- everyone in the whole world -- a fixed percentage would have no effect. No bad effect, no good effect, nothing.

But a lot of weird things would happen if the cost of capital were zero. There would be no saving: why would anybody bother to save when they could spend now at no loss. If you're paid $1000 today and having nothing better to do, hey, buy a flat-screen TV; if you need the money next week, you can always sell the thing for the same $1000 ("zero cost of capital" implies zero depreciation on capital purchases, after all). And all investments must have zero risk: any non-zero risk means people would prefer Treasury bonds. Not that anyone's investing anyway, might as well buy more plasma TVs, and houses and cars, since you can use them and, as capital purchases, they are free and fully fungible and more fun than bonds.

As soon as capital isn't free, then wage level starts to matter. Imagine all capital is free except bulldozers, which depreciate. Then a 10% world-wide wage increase would throw ditch-diggers out of work, as their employers substitute the previously more expensive 'dozers.

If "Paul Allen" is right, Krugman is confusing the nominal time-value of money with the real cost of all capital. If so, I'm guessing the Bank of Sweden people will want Krugman's Nobel returned.
12.1.2008 10:11pm
David Warner:
Anderson,

I'm curious about your qualifications for passing judgment on the relative merits of Krugman and Shlaes. After all, we should only listen to experts, so where's your license for directing the rest of us to whom we should and should not listen?

Appeals to authority are especially tiresome from erstwhile progressives who should know better.
12.1.2008 10:27pm
Paul Allen:

If "Paul Allen" is right, Krugman is confusing the nominal time-value of money with the real cost of all capital. If so, I'm guessing the Bank of Sweden people will want Krugman's Nobel returned.

The ability for an individual to have a remarkable insight into a particular problem, does not make him infallible, but it can earn him a Nobel. Krugman trades on his academic success, but there is a distinction between his academic work and his political work. Your first red-flag should have been his citation to Keynes. Keynes is not an accurate depiction of the modern Keynesian school. It is, however, a political cudgel.
12.1.2008 11:33pm
Dilan Esper (mail) (www):
Dilan, here is Gunnar Myrdal, a Socialist, predicting (correctly) the effects of well-above-market minimum wages in the South, once the wartime ended:

Professor Bernstein, there were plenty of reasons in the post-war period why blacks moved north, most of which had nothing to do with wages.

In any event, I will concede you have a kernel of truth in your argument-- the New Deal was not particularly friendly to blacks. At the time, FDR was still holding onto the Solid South, so he was a pretty lousy President on Civil Rights and there are features built into both the NLRA and Social Security that reflect this.

But you keep on shifting your argument. At first, it was that the minimum wage was a terrible thing but we just didn't see it because World War II and the WPA employed everyone. Now you are claiming that the minimum wage caused post-war unemployment. Of course, post-war unemployment was very low, but beyond that, I don't see how you can isolate the return of GI's to the workforce as well as the Jim Crow and segregation-inspired migrations to establish that black unemployment was a result of the minimum wage going up. Obviously, working blacks and women were going to be the victims of the post-WW2 reintegration of GI's into society, and they were. That had nothing to do with the minimum wage

And meanwhile, because FDR raised that minimum wage, low-wage workers got paid a lot more money during the full employment economy. Not that you would care about that; after all, if the market value of one's labor is beneath subsistence level, you believe government should do-- exactly what? Nothing?

Look, I am not dogmatic about this. Raising minimum wages, in some situations, is a bad idea because the price elasticity of the demand for labor is high enough to put people out of work. The problem is that I think you are dogmatic about this-- you believe minimum wages interfere with freedom of contract and therefore would oppose them even if they did not cause unemployment in a particular circumstance. And that leads you to make economic claims that are rather wild and certainly beyond what the evidence supports.
12.2.2008 12:04am
Ryan Waxx (mail):
If "Paul Allen" is right, Krugman is confusing the nominal time-value of money with the real cost of all capital. If so, I'm guessing the Bank of Sweden people will want Krugman's Nobel returned.


Not really. With certain people, being correct in one's opinions is more important than one's accomplishments. We may be seeing the beginning of another Nobel category falling to this clique, as I see no evidence that Krugman's current illiterate writings embarrass those who awarded the prize and thus lend this kind of crap an aura of legitimacy.
12.2.2008 8:24am
davidbernstein (mail):
And meanwhile, because FDR raised that minimum wage, low-wage workers got paid a lot more money during the full employment economy
What your missing is that in the full employment economy, wages were above the minimum wage anyway, so the law had no effect. If market wages were below the mandated minimum wage, there wouldn't have been full employment.
12.2.2008 11:44am
cbyler (mail):
The fact that economists disagree isn't an argument for ignoring the economists in favor of what some yahoo thinks.

Lawyers disagree on lots of issues, but I wouldn't resolve a legal disagreement by finding out what Joe the Plumber thinks.

And biologists disagree on some fine points, but that's no reason to jump to creationism.

It's looking increasingly like Shlaes is the economic equivalent of a creationist.
12.2.2008 11:47am
Tyrone Slothrop (mail) (www):
This post of Krugman's may help address the original confusion, and explain why so many commenters' attempts to refute Krugman and Keynes with introductory economics are going off the rails:


The greatness of Keynes …

… is illustrated by the trouble people who consider themselves well informed have, to this day, in understanding the basic principles of how a depressed economy works.

The key to Keynes's contribution was his realization that liquidity preference — the desire of individuals to hold liquid monetary assets — can lead to situations in which effective demand isn't enough to employ all the economy's resources. When you don't understand that principle, you end up writing stuff like this:


Obama's "rescue plan for the middle class" includes a tax credit for businesses "for each new employee they hire" in America over the next two years. The assumption is that businesses will create jobs that would not have been created without the subsidy. If so, the subsidy will suffuse the economy with inefficiencies — labor costs not justified by value added.

That is, if the private sector wouldn't have created a job on its own, that job shouldn't have been created — whereas the real choice is between having workers doing something and being uselessly, destructively unemployed.

From the same article, we have this:


In a forthcoming paper, Ohanian argues that "much of the depth of the Depression" is explained by Hoover's policy — a precursor of the New Deal mentality — of pressuring businesses to keep nominal wages fixed.



I've already pointed out how Keynes disposed of the money-wage argument, way back in 1936.

Why do people still fail to get Keynes, after all these years? Keynes might have said
that it's the inherent difficulty of the concepts:


For—though no one will believe it—economics is a technical and difficult subject.


But there's also the Upton Sinclair theorem:


It is difficult to get a man to understand something, when his salary depends upon his not understanding it.





The emphasis is mine. I hope I reproduced all the links correctly.
12.2.2008 12:50pm
Brian Macker (mail) (www):
<i>"Second, everyone agrees about the stimulus effect of World War II."</i>

Baloney.
12.2.2008 12:50pm
David Welker (www):

Right. Which reminds me, apropos your other posts here tonight and on other occasions, I was wondering when was the last time you had your blood pressure checked. Seriously. All that huffing and puffing can't be a good sign.


You give yourself far too much credit. (What else would I expect though.)

You not only imagine yourself qualified to comment outside your field, you feel you are so qualified that you are in a position to call those who have actual accomplishments in economics "quacks." It is bizarre. It is, to me, an amusingly relevant point to bring up when you decide to spout off about economics: "Here is that crazy blowhard physicist again who thinks that real economists are 'quacks' spouting off more opinions on economics."

This is mildly amusing to point out, that is all.
12.2.2008 12:59pm
Bart (mail):
Sasha Volokh (mail) (www):

Bart: You have a hypothetical in which the government arbitrarily raised wages from $50k to $60k, but the employer only had $1 million available to pay wages, which is "what the market would bear." I don't understand this.

I do understand that particular wages are what the market would bear, so if you had said "$50k is the wage that the market will bear," I would have understood.

There is no functional difference in my hypothetical between how the market sets what the company has available to pay wages and the wages paid.

My hypothetical assumes a market price for widgets, gross income from the sale of those widgets and a net income left to pay wages after overhead and profit are removed. The market wage is simply the net income left to pay wages divided by the number of workers.

For simplicity sake, I am assuming that there is a sufficient supply of labor willing to take the market wage for making widgets.

Now if we stick with "$50k is the wage that the market will bear," then that's still problematic. As I (perhaps imperfectly) understand Krugman to be saying, if all wages are arbitrarily increased by 20% (e.g. $50k to $60k), and if the cost of capital is zero, then prices also increase by 20%, and in the grand new market equilibrium, $60k is now the wage that the market will bear. This is basically (it seems to me) just the same as inflation, and it doesn't need to involve workers losing their jobs.

Krugman is living in a fantasy world.

1) The United States does not live in a closed economic system. Our goods compete against the goods produced by the rest of the world. If a government dictat increased wages and thus prices by 20%, our goods would lose market share and our firms would lay off workers. (See the EU).

2) If the United States raised tariffs to protect overpriced US goods, other nations would retaliate and our exporters would lay off workers. (See the Smoot Hawley tariff which was key in triggering the Depression).

3) Even assuming a closed system, there are additional problems. Wages need to be paid immediately while a future speculative return on the increased demand will not occur until later. I know of no lender who will loan money to a business to meet a government mandated increase in labor costs on the speculation that future demand will enable the business to pay back the loan.

4) Even assuming that loans are available, businesses will be paying interest on these loans rather than on expanding the business, leading to less future employment. Macro economically, the hundreds of billions if not trillions in loans to cover increased labor costs will not be made to expand business, leading to less future employment.

In sum, governments have never been able to repeal the laws of supply and demand through fiat.
12.2.2008 1:09pm
Crust (mail):
Brian Macker: OK, everyone who has a clue what they are talking about agrees about the stimulus effect of World War II. But then again I'm one of those silly people who is not inclined to take Shlaes that seriously on economic theory given that her background is a degree in English.
12.2.2008 1:19pm
Brian Macker (mail) (www):
Tyrone Slothrop,

Keynes theory fails as science for four reasons. 1) His theories are self contradictory. 2) His theories fail empirically with regard to past information. 3) His theories fail to predict future economic behavior.

That's if you take a falsifiable interpretation of Keynesian theories. Many pro-Keynesian economists do not take a scientifically falsifiable view, and instead treat these theories as religion. A religion which no conceivable set of economic results would falsify. In fact to the point where they deny falsifying empircal evidence, like the high unemployment rates during the Great Depression. They also make ad hoc adjustments to the theory to explain away contradictory empircal evidence such as stagflation.

Keynes theory is a truly a joke and fails to even include a proper capital theory.

Keynes and Krugman fail to understand the most basic aspects of monetary theory like the difference between productivity generated deflation and fractional reserve generated deflation.

Their theory leads them to take seriously incredible ridiculous economic fallacies such as "The Broken Window" fallacy and "The Paradox of Thrift". According to these "geniuses" the devistation of part of the country by hurricane Katrina is good, and savings is bad.

If you can swallow that then I guess you can swallow just about anything.


Their mental models are really self contradictory toys and the people they claim have trouble understanding Keynesian models are actually comprehending and rejecting obvious nonsense.

Anyone who understands how markets work is going to have problems with Keynesianism precisely because it is nonsense.
12.2.2008 2:11pm
Brian Macker (mail) (www):
<i>Crust: OK, everyone who has a clue what they are talking about agrees about the stimulus effect of World War II.</i>

Crust,

Actually, you've got it backwards. Anyone who has a clue about economics realizes that using resources to create bombs to drop on and destroy the capital and manpower of other nations is not good for any of the involved nations economies.

I guess if you were clueless and failed to realize that some economics measures like GDP aren't true measures of prosperity you might make this mistake. But seeing as how having the government employ people to tear down the Rocky Mountains to fill in the Grand Canyon would show up as a increase in GDP you might want to reconsider the metrics by which the WWII is to be considered good for the economy.

I assume by "stimulus" you were making the common mistake of thinking that word should be taken in a positive light. Like the "stimulus" of employing ones labor force to lug grenades and machine guns off to beaches and agricultural fields in order to turn them into barbwired death machines. Not only using that labor force to kill others but to be killed themselves.

Sounds real productive to me. I betcha that increased the productivity of those areas greatly too. Probably increased tourism and agricultural output. Funny how they never include sunbathers in those movies about Omaha beach.

Obviously the war wasn't about productivity. What about after the war? Well, it certainly helps one nations economy when an economic crank of a president dies in office, and the war ends with most other industrial nations laying in ruins. If only FDR had died sooner.
12.2.2008 2:30pm
Dilan Esper (mail) (www):
What your missing is that in the full employment economy, wages were above the minimum wage anyway, so the law had no effect.

As Professor Duncan Kennedy once said about law and economics, it all seems based on empirical evidence that nobody seems to have at hand.

On the macro level, certainly in a full employment economy, real wages will rise with or without a minimum wage. But that's rather different from saying that the minimum wage won't help anyone. For whatever reasons (lack of bargaining power, structural barriers to job mobility, etc.), the wage of any particular job, even in a full employment economy, may not rise absent a raise in the minimum wage.

Again, what you say makes sense if the entire world were an Econ 101 class with perfect competition and elegant, elastic supply and demand curves. But in the real world, things aren't so elegant, and one thing minimum wages do is ensure that particular individuals see their wages increase when orthodox economic theory says they should anyway.
12.2.2008 2:54pm
DavidBernstein (mail):
When I lived in the Boston area in 1988, fast food joints were advertising for workers at at $8 plus an hour, when the federal minimum wage was, I believe, $3.35. If Massachusetts had passed a law in 1979 dictating a $6 per hour minimum wage in 1988, it would have had precisely no effect on the Boston labor market. Similarly, in WWII jobs in war industries were plentiful at more than 40 cents per hour, so the 40 cents per hour was irrelevant. And besides, the architects of what seemed like the high 40 cent wage in 1938 explicitly acknowledged, and welcomed, the fact that they thought it would destroy jobs. Some didn't care, and some speculated that it would lead to better jobs much later.
12.2.2008 3:50pm
David Welker (www):
Mr. Macker,

Get over yourself. Please.


Their mental models are really self contradictory toys and the people they claim have trouble understanding Keynesian models are actually comprehending and rejecting obvious nonsense.


If Keynesian theories really were "obvious nonsense" then why would a conservative like Greg Mankiw, a professor of economics at Harvard, not see it that way? Isn't he smart enough to recognize "obvious nonsense" when he sees it?

Look, if you want to go on and on with more and more nonsense, go right on ahead. No one cares. But, keep in mind that if you took a different approach, you might actually 1.) learn something and 2.) actually have your point of view taken seriously by someone besides yourself.
12.2.2008 4:14pm
Dilan Esper (mail) (www):
When I lived in the Boston area in 1988, fast food joints were advertising for workers at at $8 plus an hour, when the federal minimum wage was, I believe, $3.35. If Massachusetts had passed a law in 1979 dictating a $6 per hour minimum wage in 1988, it would have had precisely no effect on the Boston labor market. Similarly, in WWII jobs in war industries were plentiful at more than 40 cents per hour, so the 40 cents per hour was irrelevant. And besides, the architects of what seemed like the high 40 cent wage in 1938 explicitly acknowledged, and welcomed, the fact that they thought it would destroy jobs. Some didn't care, and some speculated that it would lead to better jobs much later.

Not to belabor this, but it doesn't answer my point. Surely you do not know whether there were fast food joints in Boston (or other jobs in Boston) which WERE paying $3.35 an hour. You just know that the vacancies were being advertised at much more than that.

As I noted above, there are all sorts of reasons why, even in a full employment economy, a particular job's wage won't rise. The simplest is a concept from microeconomics, job stickiness. Essentially, a particular employee's cost of seeking new employment exceeds the expected benefit in terms of a higher wage. Thus, that employee may stay in a particular job with a below market wage. In addition, people are forced to constrain where they work, what hours they work, and other aspects of their job due to the structure of their lives. All this is just a way of saying that the labor market is not perfectly competitive, and thus a constriction of supply may not cause all prices to rise, even if most of them do.

So, a properly priced minimum wage picks up the stragglers. And it does so without causing unemployment, because, as you note, it is still under the market wage rate.
12.2.2008 7:17pm
Sasha Volokh (mail) (www):
Bart: Just sticking to the first part of your response... this is senseless.

My hypothetical assumes a market price for widgets, gross income from the sale of those widgets and a net income left to pay wages after overhead and profit are removed. The market wage is simply the net income left to pay wages divided by the number of workers.

This is backwards. Wages aren't what's left over after you subtract profit (and other stuff). Rather, profit is what's left over after you subtract wages (and other stuff)! There's no fixed amount that has to go to profit. In fact, many companies end up zero profits, or in fact make losses; some companies end up making huger profits than they ever dreamed!

To say that the amount of money available to pay workers is fixed is basically to say that the elasticity of labor demand is necessarily 1.

For simplicity sake, I am assuming that there is a sufficient supply of labor willing to take the market wage for making widgets.

I'm not sure what this means at all. "Sufficient" to do what? The "market wage" is defined as where demand meets supply -- so definitionally, there is a sufficient supply of labor to meet the demand for labor at that wage.

Just to briefly touch on your later point --

Wages need to be paid immediately while a future speculative return on the increased demand will not occur until later. I know of no lender who will loan money to a business to meet a government mandated increase in labor costs on the speculation that future demand will enable the business to pay back the loan.

Lenders loan money to businesses based on all sorts of speculation all the time. Think of any start-up that gets money from the stock market after an IPO, from a bank, or from a venture capitalist -- all based on the speculation that, perhaps after years of product development, there's going to be demand for the product.

Of course usually the lending isn't based on government-mandated wage hikes. But (1) as I've noted above, the money doesn't need to be borrowed from debt or equity markets, it could just be taken out of profits if those are available; (2) if Krugman's model is right (a separate issue entirely, possibly dubious), then the general increase in prices isn't speculative, but rather expected by informed parties. This would make any lending much less speculative than much actual lending to businesses.
12.2.2008 8:16pm
Brian Macker (mail) (www):
David Welker,


Are we all still Keynsians now?

No, just those of us who know anything.


Who's full of themselves? Keynes was a crackpot, just like Marx, and you think that your swallowing his baloney is a sign of superiority.

I gave clear examples of fallacies that Keynes and Krugman buy into. Do you ascribe to the broken window fallacy merely on your worship of educational degrees and prizes? How about supporting your crazy theories on their merits?
12.2.2008 9:08pm
Bart (mail):
Sasha Volokh (mail) (www):

Bart: Just sticking to the first part of your response... this is senseless.

My hypothetical assumes a market price for widgets, gross income from the sale of those widgets and a net income left to pay wages after overhead and profit are removed. The market wage is simply the net income left to pay wages divided by the number of workers.

This is backwards. Wages aren't what's left over after you subtract profit (and other stuff). Rather, profit is what's left over after you subtract wages (and other stuff)! There's no fixed amount that has to go to profit. In fact, many companies end up zero profits, or in fact make losses; some companies end up making huger profits than they ever dreamed!

The primacy of profit is "senseless?" Are you kidding?

The only reason a business is created is to make profit. This is especially true of publicly owned companies whose stockholders will only realize gains if the business is making profit.

Businesses often strive to meet a certain target profit and will minimize overhead and labor costs to achieve that profit.

More importantly for this discussion, a business that allows rising labor costs to eliminate profits will soon either be out of business or taken over by new management.

To say that the amount of money available to pay workers is fixed is basically to say that the elasticity of labor demand is necessarily 1.

Sasha, we are getting off topic. Elasticity of labor demand in a market is a completely different subject from the effect of a non-market government intervention to increase wages which my simple hypo was meant to address.

Just to briefly touch on your later point --

Wages need to be paid immediately while a future speculative return on the increased demand will not occur until later. I know of no lender who will loan money to a business to meet a government mandated increase in labor costs on the speculation that future demand will enable the business to pay back the loan.

Lenders loan money to businesses based on all sorts of speculation all the time. Think of any start-up that gets money from the stock market after an IPO, from a bank, or from a venture capitalist -- all based on the speculation that, perhaps after years of product development, there's going to be demand for the product.

Of course usually the lending isn't based on government-mandated wage hikes...

I spoke of a very particular type of speculation - whether a business can recoup a government mandated increase in labor costs above market rates - not whether a new product will sell on the market. If you are aware of a single instance where a private lender has loaned money on such speculation, I would be interested to see the evidence.

But (1) as I've noted above, the money doesn't need to be borrowed from debt or equity markets, it could just be taken out of profits if those are available...

Indeed, that is the assumption of my hypo. The problem is that most businesses have a rather thin profit margin that would be eliminated if labor costs were artificially forced 20% over market rates. Businesses that do not make profits go out of business. See the auto industry for the effect of paying substantially above market labor costs.
12.2.2008 9:28pm
David Welker (www):
Mr. Macker,

Why would I be interesting in a dialogue with you exactly?

Again, if it were "obvious" that Keynesian theory was total "nonsense," why would a conservative professor of economics at Harvard named Greg Mankiw not see that?

You don't have to worship academic accomplishment for that to be a valid question. You don't have to think that people who know what they are talking about, like Greg Mankiw, are always right. (In fact, I disagree with him often enough myself. Especially given that I am a liberal, not a conservative.) But, don't you think it is just a tad bit strange to say not only are people like him not right, but they are just too stupid to see that which you claim is totally "obvious?"

The bottom-line is this. If you want to be taken seriously, you will take a different approach. I personally don't take care what you do. I have nothing at stake here.

Guess what, unfortunately, there are too many wackos out there with wacko theories and I do not have the time and especially not the inclination to address all of their crazy talk. If you start sending signals that you are a wacko by saying things that are clearly way off (i.e. mainstream economic theories like Keynesian theory are not only wrong, but "obvious nonsense") then don't expect people who value their time to engage with you.

Maybe your not a wacko. But, you sure sound like one when you talk like that.
12.3.2008 12:11am
David Welker (www):
Well, for fun, here is a note by Paul Krugman that explains his views on why increased wages would not have much of an employment effect during the Depression.
12.3.2008 12:46am
Paul Allen:
Sasha writes:

This is backwards. Wages aren't what's left over after you subtract profit (and other stuff). Rather, profit is what's left over after you subtract wages (and other stuff)! There's no fixed amount that has to go to profit. In fact, many companies end up zero profits, or in fact make losses; some companies end up making huger profits than they ever dreamed!

Very misleading. Every going concern earns a return on capital. Because of the Tax Code, corporations tend to adopt a growth strategy that gives a return on capital without substantial headline profit.

Significant price inflation or deflation does not change this, but it does make it difficult to sort out the facts because 'money' is not properly serving as a unit-of-account.

Very quickly we hit Krugman's nonsense about the 'zero lower bound'.
12.3.2008 12:51am
Harry Eagar (mail):
Wow, over 80 comments about the New Deal with nary a mention that a big part of it (the killing baby pigs part) was about lowering production so that commodity prices would rise so that primary producers would have an income that could be spent on consumer goods.

Something like a third of Americans in the '30s were primary producers, heavily concentrated in the south.

Krugman is not a fool. Zero is a price point you cannot get under. In Iowa, people used No. 2 corn for boiler fuel because it could not be sold at any price.

Anderson is too kind to Shlaes. She is not merely an uninformed hack. She misrepresents what the New Deal was. Possibly she does not know what it was. But if she claims to know what it was, then . . .
12.3.2008 1:02am
Brian Macker (mail) (www):
Dear David,

I see that you are operating with certain delusions about the world that I must disabuse you of.

1) You are the one who initiated a dialog with me on this thread. Yet you question me as to why you would be interested in a dialog with me. My answer to that is that it doesn't matter what you are interested in since obviously you are already in a dialog with me.

2) I haven't read much "Greg Mankiw" but I did see a couple posts on his blog and I'm not particularly impressed with him. In case you haven't gotten the news Conservatives are screwups just as often as liberals. Take Nixon's wage and price controls as an example, or Hoovers interference in free markets. I hope that puts to bed your emphasis on his conservative creditials. That doesn't impress me in the least. If not here are some more tidbits for you.

I in fact have a pretty low opinion of conservatives on many an issue. There's plenty of PHD toting conservatives who when asked whether they believed in the most absurd questions would answer in the affirmative. For instance, if asked whether Jesus arose from the dead, was born of no father, and could walk on water, I would get a yes. There are certainly plenty of people who do not see this as an obviously incorrect belief.

Meanwhile these same conservatives would laugh at similarly absurd beliefs held by equally intelligent and credentialed PHDs from India who are of Hindu or Muslim faith. Or the beliefs of ancient Athenians of even greater stature.

Each finds it obvious that the others beliefs are absurd and obviously wrong precisely because all these sets of religious beliefs are absurd. None are correct.

You see, I understand that that intelligent and credentialed people are quite capable of making fairly obvious mistakes. You apparently aren't.

There are quite a few very intelligent and creditialed creationists who make what are quite obvious mistakes about evolutionary theory, even when they have gotten degrees in biology. Michael Behe comes to mind.

In the realm of economics there is a similar circumstance. Except in this case it is the Keynesians who hold the absurd beliefs. There are plenty of non-Keynesian economists, even ones holding PHDs and Nobel Prizes who can point out exactly where the Keynesians go wrong. That you are ignorant of these facts is no shame on me.

It is incumbent upon you however to explain these absurdities since you got on this tread before me and started accusing those who don't believe in Keynesianism of essentially being fools. There are plenty of good reasons not to believe in Keynesianism that you probably are not aware of.

For example, despite the ridculous article by Greg Mankin, there have been many instances in history where fractional reserve inflations have resulted in deflationary periods where none of the Keynesian prescriptions were followed and yet, miracle of miracles, none of the things he claims must occur actually happend. In fact, with no intervention the markets corrected.

This is in direct contradiction to Mankin's article where he states quite correctly on Keynesian theory if not reality:
"Rising unemployment and declining profits further depress demand, leading to a feedback loop with a very unhappy ending.

The situation reverses, Keynesian theory says, only when some event or policy increases aggregate demand."


In the light of a proper understanding of economics his article is laughable. Look at this howler of a paragraph:
"For the overall economy, however, a recession is not the best time for households to start saving. Keynesian theory suggests a "paradox of thrift." If all households try to save more, a short-run result could be lower aggregate demand and thus lower national income. Reduced incomes, in turn, could prevent households from reaching their new saving goals."


What a maroon. He hasn't the foggiest idea what economic interventions got us into this mess, nor what would get us out fastest.

We've just been through a 20 year period of government intervention in the free market where the Fed has been taking precisely the actions he is now prescribing. The Fed was following a policy that was destructive of savings, and distortive of the markets. What's Mankin's prescription for such a situation? More of the same except harder and faster.

You can't get much more ridiculous than that.

I'm not particularly happy that my share of this "stimulus" amounts to half my productive output from last year. Yep, the government has essentially printed monetary notes equal to half my productive output last year on my behalf and handed them over to a bunch of rich bastards who were trying to pull a fast one on everyone else. That would be so bad if it was just done for me. Problem is they did it for every American citizen.

So pardon me if I take Greg Mankin with a very large grain of salt as he avocates the quite ridiculous notion that reducing ones consumption of goods is the wrong thing to do during bad times. I can see him sitting on a lifeboat urging people to gobble all the food reserves, splurge during tough times, in order to turn the situation around. Dopey Keynesians.

The below market rates that the Fed has set on interest rates over the past twenty years has had the expected results. When you set a price ceiling below market consumers consumer more and producers produce less. In this case the consumers are borrowers and the producers are savers. It's quite clear that interest rates have been below market because the US savings rate is dismal. Likewise our borrowing rates are very high.

Like all price fixing schemes this leads to market distortions that I will not discuss in detail. However in the case of price ceilings one of those distortions is the creation of a shortage. Unlike other types of prices interest rates are temporal. Therefore with interest rate manipulations the distortion, the shortage takes time to be revealed. We are now in the stage where the error has been revealed.

If this were food that we were talking about then a price ceiling on say wheat set in the winter would cause farmers to understandably switch to other crops. Meanwhile consumers would gobble up existing stocks at a faster rate. The error would only fully be revealed in the future, when the harvest came in. There would be very little wheat and greater than normal demand for it at the low prices.

The absolutely wrong thing to do in this situation is to deepen the price control by lowering the price ceiling even further.

Yet that is exactly what Keynes and Mankin's prescription is in this situation. They want to lower interest rates even further, there have been suggestions to set it to as low as zero percent, in order to "prime the pump".

This can only lead to inflation. With what I know about current economic conditions and correct economic theory the inflation that will result from this is going to be much worse than the 1970's. 1) There are large holdings of cash overseas. 2) The government holds much of it's debt short term unlike in the past. 3) Our industrial base has been eroded by opening markets and accelerated offshoring cause by, you didn't guess it, Fed policy.

Basically, were screwed, and because of economic dolts like Greenspan, Keynes, Mankin, and Bernarke. Not to mention Clinton and Bush who should have fired Greenspans ass.
12.3.2008 2:58am
Brian Macker (mail) (www):
Harry,

The pig killing part doesn't really help Keynes's case. In fact it hurts.

Do you seriously think that during an era of soup kitchens that a farmer couldn't sell pigs two for one and get the same income as if he buried one of the pigs and sold the other? It wasn't a true surplus by the time of the incident you were talking about. It was a price control induced one, and due to wage controls there was also a surplus of hungry people.

<blockquote>"In Iowa, people used No. 2 corn for boiler fuel because it could not be sold at any price."</blockquote>

Sounds like a reasonable use actually given the government instituted policies.

Guess what, in my youth during many a boom period, I'd hear about destruction of farm products all the time. I remember as a kid hearing that they were plowing under oranges to keep the price up. It didn't make any sense to me, especially since I liked oranges and certainly would have liked the extra orange when I bought my first one.

This was NOT the depression either.

This was in no way indicative of a failure of the market. In fact, there was overproduction precisely because the government had set a price floor on oranges. The price floor made the oranges expensive so people were buying less, yet producers were producing more because at the high price they could make a profit. The government was buying up the price control induced surplus and destroying them.

Of course this diverted resources from the production of other goods to the production of oranges. These were unwanted oranges even at the market price. So there was less of other goods at the same time there was a surfeit of oranges. Also keep in mind that had the government only destroyed excess production above the quantities the market would have decided on then prices would have been at market. In order to keep prices higher than market additional oranges needed to be destroyed so that the number of oranges delivered to market were actually less than the free market would have provided.

What a total waste.

Likewise with the corn oil you give as an example. The newly instituted Fed had enabled banks to take larger risks, ie. lower their reserves, causing a increase in the money supply which distorted interest rates lower than they should have been. This meant more money (than the market would have provided) chasing the same number of investment opportunities. This caused goods that were far from consumption, commodities, to appear more profitable. Which then lead to over-production of commodities and asset bubbles.

Essentially what had happened was that productivity increases had caused an increase in goods which should have caused price deflation. The Fed however was put in place for the purpose of "price stability" which it eagerly went to work at by increasing the fractional money supply. This is the same mechanism as today.

The low interest rates, as today, caused overbuilding and asset bubbles, in things that are far from consumption. So the initial spike in the price of corn oil was a due to government intervention.

Once the error was exposed the asset bubbles should have been allowed to deflate to match the actual quantity of money. However Hoover chose to take the opposite route and started injecting massive quantities of money into the system.

FDR continued the mistakes of Hoover and added some of his own. One of these mistakes was price floors. Those floors induced continual overproduction of commodities, while at the same time depriving people of the surplus because the government had to destroy not only the extra but to below original market supply levels in order to maintain the high prices.

It was economic stupidity compounded by economic stupidity. That was only about a tenth of the stupid things he and his predecessor did.
12.3.2008 3:37am
Sasha Volokh (mail) (www):
Brian Macker: You put quotation marks around "Greg Mankiw" a few posts ago, perhaps to point out that this is David Welker's obvious spelling mistakes? You then spell him "Greg Mankin" all throughout your own comment.

This obviously doesn't go to the merits of your comments, but I just thought I would point out that the correct spelling is, in fact, Greg Mankiw. He was a professor of mine, and his name is pronounced "Man-Q," as though it were spelled "Mankew" (which it's not!).
12.3.2008 7:56am
vinnie (mail):
Doubling wages will NOT double prices. At MOST in a labor intensive industry you MIGHT get a 15% increase in price. Usually labor costs run about 5% of total expense.
Henry Ford stimulated car sales by raising wages for his employees from $1/hour to $5/hour.(Some strings attached: live in company housing. paid as a bonus after 1 year etc.)
His employees could then buy his car, and a newfangled washing machine. Westinghouse had to put on more help to build washers but had to pay more wages because they had to compete with ford and so on.
12.3.2008 12:22pm
Harry Eagar (mail):
Macker, people with zero income consome zero. If it costs more to produce the pig(s) than you sell it for, then you reduce current consumption and deplete capital.

Lose the farm.

Giving away surplus pigs doesn't change that.

You should not try to run a farm.
12.3.2008 1:42pm
Brian Macker (mail) (www):
Sasha,

I wasn't sure how to spell it but I recalled reading a blog by him and did a google search on "Greg Mankin blog" which pulled up his web site so I thought it was the right spelling. I wasn't wearing my glasses when I did the web search and the "w" looked like an "n".
12.5.2008 8:08pm
Brian Macker (mail) (www):
Harry Eagar,

... and you shouldn't try to run an economy.

The 2 for one was to illustrate a point. It doesn't mean pigs were going for zero. In fact that's just a 50% reduction in prices. Nor did prices for pigs go to zero. Every one of the pigs destroyed to attempt to keep the prices at double was a waste in my example.

Because prices are set at the margin all those pigs destroyed were valued between the governments artifical price and the market price. Destroying the pigs doesn't increase the income for the farmers and decreases the real (not nominal) wages of everyone else.

The market price for pigs wasn't going to zero. The fact is that there was already a depletion and misallocation of capital. That's the whole point.

In fact during a fractional reserve deflation some prices drop more than others. The prices of goods that were over invested in drop most. That's because the original fractional reserve inflation causes an overinvestment in goods far away from consumption. For example, right at this very moment, there is an over investment in housing.

In such an environment someone on the margin has to go bankrupt, or be pushed out of the housing construction, loan, sales, etc. business. We can't maintain this artificially high level of real estate agents, loan officers, painters, carpenters, plumbers, etc. forever. Some of them have to find a new occupation.

The current over building was due to below market interest rates. That's a kind of price ceiling and it caused the building of houses to look artificially cheap. So builders built more houses than people could afford.

Like with the farmers any initial over production was due to governmental interference in the markets.

The government could do the same thing now with houses they did with pigs during the depression. They could artificially prop up prices by either, setting price floors and not allowing anyone to sell for less than a certain amount, or they could buy up houses at the artificially high prices. They couldn't just dump the unsold or abandoned houses due to either of these policies on the market. They would have to destroy them.

That would also keep all the real estate agents, carpenters, and plumbers employed. There would still be an incentive for them to build new houses at the high prices, just so long as the government compensated them some how.

So then they'd create new houses and the government would buy them and burn them down. Meanwhile there would be lots of homeless people.

Does that sound like any way to run an economy?

The mistakes Keynesians make is:
1) They don't believe in true economic laws.
2) They don't understand the ones they do believe in.
3) They think the true economic laws are somehow suspended during "hard times".

This is total nonsense. Our ancestors were quite poorer than we are and economic law applied to them. Why should economic law all of the sudden become inapplicable just because we are having a hard time?

Price controls are a bad idea no matter what the economic environment. A command economy doesn't work. It doesn't matter how poor or how bad things are. To believe otherwise is to believe that the right prescription for the U.S.S.R. to get out of her economic distress due to communism was more communism.

Keynesians base their econmic theories on gross economic aggregates. That's why they believe stupid things like "The war got us out of the depression". Just because by a gross measure, GNP, it looks like it was the right thing to do.

As an example of how silly this is, one could increase GNP by digging up the Rocky Mountains, trucking the dirt to the Grand Canyon, and filling it in. That is if you are the government and did so by either borrowing or printing money.

They then teach this nonsense to school children and they accept unskeptically the nonsense. You have no idea how many people I've convinced of this over the years. They never really thought about it.

Keynesianism is based on the very old economic fallacy of mistaking the quantity of money in a nation with the wealth of the nation. Money is just a medium of exchange and everyone having more of it does not make everyone richer. What truly determines the wealth of a nation is the amount of goods and services, not money. Prices make up the difference.

I'd rather live in a country with ten times the goods and with half the money and twenty times lower prices, than in a country with the half the goods, twice the money, and stable prices.
12.5.2008 10:05pm