Wednesday, May 25, 2016

Lars P. Syll — The witch called ‘confidence fairy’

The confidence fairy seems to have turned into a confidence witch. One more victim of the crisis. But this one will not be missed. —Francesco Saraceno
"Confidence" like "expectations" is a weasel word whose meaning depends on how it is interpreted. Few economists doubt that confidence is key in economic behavior, or that expectations are not based on confidence.

The issue is what confidence depends upon. Is it fiscal rectitude and wage-price flexibility as neoclassical economists suppose, or it is effective demand, as Keynes posited.

Imposing fiscal discipline, disciplining labor, and "structural reform" has been tried and not work. Cutting taxes on the wealthy to spur investment has not worked either. Fiscal stimulus has been tried and worked.

Want to improve business confidence so that firms will increase investment? Send customers to their counters. Government has the power to do this by offsetting non-government saving desire with an increase in aggregate net financial assets through deficits and targeted spending and transfers.

Lars P. Syll’s Blog
The witch called ‘confidence fairy’
Lars P. Syll | Professor, Malmo University

16 comments:

Magpie said...

You wrote:

"The issue is what confidence depends upon."

That is, indeed, the issue. What does confidence depend upon?

But the answer is not as clear-cut as you believe/want us to believe: it depends who you ask.

So, you better ask Keynes. When you do, you'll find his answer, in clear English, from his own pen, as reflected in his magnum opus. A reading from the Book of Maynard (Chapter 12):

"In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends."

The Word of the Lord.

Anything could upset the "average business man", in The Lord's views. Let me repeat that: Anything.

Anything? Like what, for example?

For example, "the fear of a Labour Government or a New Deal" could depress enterprise. Yes, Tom. Fiscal stimulus could depress enterprise, at least according to The Lord.

The problem, Tom, is that Keynes never really "posited" anything. It is you and Keynesians like you who posited that.

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By the way, you don't need to take my word for that. Here's Brad DeLong:

"Summoning the confidence theory via fiscal contraction is not an obviously silly thing to do"

http://delong.typepad.com/sdj/2013/06/confusion.html

Tom Hickey said...

"Summoning the confidence theory via fiscal contraction is not an obviously silly thing to do"

Depends on the circumstances.

The issue here is in a global economic slump. The current conventional view is for countries to increase business confidence and therefore investment through "reform" to "purge" the system of inefficiencies and to strengthen balance sheets, including government balance sheets.

The answer that Keynes gave was for government to offset demand leakage to saving (what is now called "the global savings glut," I.e., low investment) with government spending. Post Keynesianism and MMT elaborate on this.

Magpie said...

I should add something: I'm not saying you, Tom, and Keynesians like you are wrong.

Quite to the contrary. I actually believe you guys are right: fiscal stimulus can solve depressions.

What I am saying is that (1) you guys and (2) The Lord cannot all be right at the same time. One side must be wrong.

It's time to let The Lord rest in peace (or rot in hell, whatever you prefer).

Tom Hickey said...

According to MMT economists, Keynes didn't get everything right. I don't see them taking Keynes as the ultimate authority. Indeed, others seem to have preceded Keynes in some of his major positions. But Keynes did present a "general theory" that was correct in many respects that are still important and being overlooked. He deserves credit for that. I am not savvy enough in the history of economics to be able to say who has temporal precedence in putting forth these ideas. Similarly, with Marx.

Calgacus said...

Magpie: That is a very strained reading of Keynes. Keynes & the Keynesians certainly do agree that "fiscal stimulus can solve depressions". So to either, De Long's summoning is an obviously silly thing to do in a depression.

Postkey said...

Fiscal stimulation did not 'work' in Japan?

“ . . . whereby the coefficient for ∆g is expected to be close to –1. In other words, given the amount of credit creation produced by the banking system and the central bank, an autonomous increase in government expenditure g must result in an equal reduction in private demand. If the government issues bonds to fund fiscal expenditure, private sector investors (such as life insurance companies) that purchase the bonds must withdraw purchasing power elsewhere from the economy. The same applies (more visibly) to tax-financed government spending. With unchanged credit creation, every yen in additional government spending reduces private sector activity by one yen. “
http://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf

Matt Franko said...

Post that person is ignorant of the Dealer system like Dan Kervick was here for years....

Ins cos don't buy from the govt they buy from Dealers....

Matt Franko said...

Post also these are idiot economist concepts of "Demand" and "Aggregate Demand" and "Purchasing Power"...

Magpie said...

"Magpie: That is a very strained reading of Keynes."

Calgacus, it's not with me you need to argue that. I gave DeLong's quote. You must produce something tangible, or, much better, argue that with DeLong. Convince him he is wrong. Then, we can talk.

Or tell Skidelsky that:

"As a Keynesian, I firmly believe that market economies need to be stabilized by policy. But Keynesians have to face the uncomfortable truth that the success of stabilization policies may depend on the business community having Keynesian expectations. They [i.e. Keynesian economists] need the confidence fairy to be on their side."
http://www.project-syndicate.org/commentary/economic-policies-public-expectations-by-robert-skidelsky-2015-03

Or tell Krugman:

"One way to answer this is to point out that Keynes said a lot of things, not all consistent with each other. …
Now, what have those who declare themselves the true Keynesians had to offer? Has insisting that expectations are volatile and unpredictable been helpful in this context? Actually, if anything it lends support to believers in the confidence fairy. After all, if it's all animal spirits, who are we to say they're wrong?"

http://krugman.blogs.nytimes.com/2015/03/28/unreal-keynesians/

Or tell Arthur Laffer (yes, that Arthur Laffer):

http://www.heritage.org/research/reports/2004/06/the-laffer-curve-past-present-and-future

Or, better yet, tell Keynes that: it was him, not me, who wrote about the New Deal. And it's there, written in black and white, in English: the New Deal could scare the "average business man". The quote is above.

After that, I'll be happy to reconsider.

Calgacus said...

Magpie - Of course I saw the quote. But again, that is a strained, out of context reading of one passage. I don't believe in ignoring the multitude of other things that Keynes said, for instance in that chapter, that make it clear that this an aside, a qualification, an observation appended to his main thesis - the efficacy & desirability of fiscal "stimulus".

Keynes's latterday misinterpreters are reading things that simply aren't there. When he was alive, nobody read Keynes the way DeLong, Skidelsky & you are reading him. None of the Keynesians of any stripe of the 40, 50s & 60s, even including the neoclassical synthesis, bastard, hydraulic, old Keynesians did, or had any doubt about what Keynes posited. It took a considerable length of time to perform such intellectual gymnastics and then consider them natural. To go from this to Skidelsky's "They [i.e. Keynesian economists] need the confidence fairy to be on their side" is an unjustifiable, giant step, a nonsequitur.

"Anything could upset the "average business man", in The Lord's views. Let me repeat that: Anything." Though this exaggerates Keynes's remarks somewhat, it is of course true. It is a case of the general truth: Everything is connected to and affects everything else. What of it? So what? Of course the New Deal could & did scare the "average business man". People who want to be scared will be. And of course the New Deal prosperity made this fear an abstract, enjoyable one, like that of hellfire in church, while the weekdays were devoted to engaging the animal spirits revived by the New Deal, in pursuit of money. An FDR speech wryly commented on the attitude of the business community, now out of its sickbed & strong enough to threateningly shake its crutches at Dr. New Deal.

Magpie said...

Calgacus,

Correct me if I'm mistaken: for Keynes Animal Spirits was the explanation for recessions. Everything seemed to be working just fine in the economy, until for some reason, people had thrift crisis. Aggregate demand falls, production falls, employment falls.

If you accept that theory of crisis, you must accept that fiscal stimulus could depress the economy. There is no way around.

Do you believe in Animal Spirits? You don't have to, but if you do, you must believe in the Confidence Fairy.

Why? Simple: Confidence Fairy = Animal Spirits.

In this case, you have an explanation for the disease, but your cure may well kill the patient.

You don't believe in the Confidence Fairy? Then, there is no way you can believe in Animal Spirits. You can confidently prescribe the treatment; the downside is that you don't know what caused the disease.

Your choice, but you can't have your cake and eat it. It's either one or the other, but not both.

==========

"When he was alive, nobody read Keynes the way DeLong, Skidelsky & you are reading him".

I should feel flattered then: I'm in pretty good company. I mean, Keynes' greatest biographer and lil' ol' me? That's a pretty nice way of being wrong.

Not to mention DeLong, whom I've seen commenters here calling him "bona fide genius".

Unfortunately, my friend, I'm afraid it's you who are wrong.

Nobody read Keynes that way? Says who?

Ever since The General Theory was published it was the subject of debate: what Keynes really meant?

Mark Blaug had a jolly good time commenting on that: every single reader interprets The General Theory in a slightly different way.

http://aussiemagpie.blogspot.com.au/2016/03/blaug-weintraub-keynesian-historiography.html

A couple of years after the publication of The General Theory Hicks invented the ISLM. I am sure Hicks was sure he alone, among all Keynes' disciples, understood the Master.

==========

"Anything could upset the "average business man", in The Lord's views. Let me repeat that: Anything." Though this exaggerates Keynes's remarks somewhat, it is of course true.

I rest my case. :-)

Magpie said...

By the way, I forgot to mention another person in that list. I'll correct correct that omission, now.

Robert Higgs (senior fellow at the Ludwig von Mises Institute, adjunct scholar at the Cato Institute) claims to have discovered what he calls "regime uncertainty" (i.e. the Confidence Fairy).

He writes lambasting Paul Krugman and Keynes. (http://blog.independent.org/2011/08/03/the-confidence-fairy-versus-the-animal-spirits-not-really-a-fair-fight/)

Still, after that, even Higgs is forced to tip his hat to The Lord:

"As against this varied and substantial evidence, what does the proponent of animal sprits have to offer? Well, nothing at all. The idea is purely fanciful, the product of Lord Keynes’s fertile imagination.

"However, we would do well to note that in the section of his book where Keynes introduces the idea of animal spirits, he also discusses it in a way that makes its effects somewhat similar to those of regime uncertainty as described in my own writings.

" 'This [operation of varying animal spirits] means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent;—it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends.' (p. 162, emphasis added)

"Although Keynes greatly underestimated the degree to which investors’ expectations about the security of their property rights rest on perfectly rational grounds for fearing what a Roosevelt administration or an Obama administration might do, he recognizes that, whatever the basis for variations in the flow of animal spirits, business confidence plays an essential part of driving private investment. Paul Krugman, please reread your master’s masterpiece."

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That's what Krugman was writing about. Any similarity with Keynesian fundamental uncertainty is purely accidental (!!!???)

Postkey said...

"A couple of years after the publication of The General Theory Hicks invented the ISLM. I am sure Hicks was sure he alone, among all Keynes' disciples, understood the Master."

The 'Master' appears to concur with the IS/LM interpretation?

' . . . in his letter of 31 March 1937, commenting on a draft of Hicks' 1937 paper, Keynes wrote: “I found it very interesting and really have next to nothing to say by way of criticism.”'

http://www.econ.ucla.edu/workingpapers/wp537.pdf

A way to overcome the 'Confidence Fairy'?

“Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative.”
https://www.marxists.org/reference/subject/economics/keynes/general-theory/ch24.htm

Tom Hickey said...

Keynes discusses expectations and confidence in General Theory chapter 12. Here is section VII on animal spirits.

Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; — though fears of loss may have a basis no more reasonable than hopes of profit had before.

It is safe to say that enterprise which depends on hopes stretching into the future benefits the community as a whole. But individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits, so that the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death.

This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent; — it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends.

We should not conclude from this that everything depends on waves of irrational psychology. On the contrary, the state of long-term expectation is often steady, and, even when it is not, the other factors exert their compensating effects. We are merely reminding ourselves that human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance.


J M Keynes, General Theory, Ch. 12 The State of Long-Term Expectation, VII

Magpie said...

"The 'Master' appears to concur with the IS/LM interpretation?"

Maybe he did, maybe he didn't. Frankly, I don't know (and it's not particularly important to me).

Steve Keen and Lars P. Syll would say The Lord didn't accept the ISLM model and they argue it's anathema for real post Keynesians (like real men, post Keynesians don't eat quiche); Paul Davidson would say he convinced Hicks of the wrongness of his ways.

Keynes himself, in your quote, seems to accept it, even if he doesn't sound upbeat about it.

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Abba Lerner's well-known joke is very apropos:

"But look," the Rabbi's wife remonstrated, "When one party to the dispute presented their case to you, you said 'you are quite right' and then when the other party presented their case you again said 'you are quite right', surely they cannot both be right?" To which the Rabbi answered, "My dear, you are quite right!"

For Lerner, Keynes was the Rabbi. Unlike any of us, he knew him personally.

Postkey said...

In reply to a letter to Harrod: Keynes said: “instructive and illuminated” But, “you don't mention effective demand.”