Monday, October 24, 2016

Brad DeLong — Why Did Keynes Write "In the Long Run We Are All Dead"?


History of economics lesson.
Keynes is discussing how to use the quantity theory of money as an analytical tool.
What he is saying is that you cannot assume that you can analyze the consequences of an altered time path of the quantity of cash in the economy--n, in Keynes's notation--without considering whether the public's demand for real cash balances k, the public's demand for real checking-account balances k', and banks' desired reserves-to-deposits ratio r will also change. This is a principle that today's economists call the "Lucas Critique". (No, it is not clear to me why they do not call it the "Keynes Critique".) And this critique is correct: assume that those three other variables are not themselves altered when you consider an altered path for the money stock is, as Keynes says in the sentence after "in the long run…", for economists to set themselves too easy a task--it sweeps all the problems of analysis under the rug--and too useless a task--it generates predictions that are simply wrong.
In this extended discussion of how to use the quantity theory of money, the sentence "In the long run we are all dead" performs an important rhetorical role. It wakes up the reader, and gets him or her to reset an attention that may well be flagging. But it has nothing to do with attitudes toward the future, or with rates of time discount, or with a heedless pursuit of present pleasure.
So why do people think it does?
Note that we are speaking not just of Ferguson here, but of Mankiw and Hayek and Schumpeter and Himmelfarb and Peter Drucker and McCraw and even Heilbronner--along with many others.….
Grasping Reality with the Invisible Hand
Why Did Keynes Write "In the Long Run We Are All Dead"?
Brad DeLong | Professor of Economics, UCAL Berkeley

24 comments:

Matt Franko said...

Gold standard.... re-set t=0....

Magpie said...

Let's see if I got this straight. Brad DeLong, John Podesta/HRC's proxy in charge of peddling their TPP, is lambasting Niall Ferguson, Hayek, Schumpeter: they argue in bad faith.

So, the Three Stooges argue in bad faith, as opposed to whon? DeLong? Hilary?

As they say, vox populi, vox Dei: same shit, different pile. There are only two differences between DeLong and the Three Marketeers: the accent and about 30-40 pounds of sanctimonious fat.

GLH said...

Tom Hickey: Off the subject, but is it correct to say that a fiat currency is based on productivity?

Tom Hickey said...

is it correct to say that a fiat currency is based on productivity?

Not in the MMT world. A fiat currency is based on the ability of the issuer to levy and collect taxes in the currency. The value of the currency is what the issuers choose to set as the monopolist.

Productivity in economics is the input-output ratio, that is, the amount of resources used to produce a unit of output. Productivity factors are innovation, efficiency, and skill level.

Living standard is based on productivity. The standard of living of different cohorts is based on distribution.

GLH said...

I understand you to say that it would be correct to say that the value of a fiat currency is based on the productivity of the economy?

Tom Hickey said...

I understand you to say that it would be correct to say that the value of a fiat currency is based on the productivity of the economy?

No, it is not correct. Money is determined institutionally, while productivity is an economic ratio. They don't bear on each other directly.

An economy with strong economic growth (GDP) and high productivity economically (GDP/resource input), like Germany, may have a fiat currency that is weak institutionally. The issuer of the euro, the ECB, has no productivity directly related to it.

peterc said...

Yes, agreed on all points, Tom.

According to MMT, currency viability depends upon imposition and effective enforcement of a tax obligation payable only in the government's currency.

There is no direct relationship between a government's capacity to enforce the tax obligation and the degree of development or level of productivity of a society.

MMTers define value of the currency in terms of what must be done to obtain it. What must be done is determined by the currency issuer. This is referring to domestic value of the currency. It is not referring to exchange rates.

Here is a passage from a book chapter by Pavlina Tcherneva (link: http://media.wix.com/ugd/f4c1a3_03925ed1807f4eebb9eb41389f284d40.pdf ):

"For example, if the state required that to obtain one unit of HPM [high-powered money], a person must supply one hour of labour, then money will be worth exactly that – one hour of labour (Wray, 2003b: p. 104). Thus, as a monopoly issuer of the currency, the state can determine what money will be worth by setting ‘unilaterally the terms of exchange that it will offer to those seeking its currency’ (Mosler and Forstater, 1999: p. 174)"

Matt Franko said...

GLH,

Value in terms of what? Another currency? Goods?

You have to have units in the denominator... what units is in the denominator?

Matt Franko said...

" if the state required that to obtain one unit of HPM [high-powered money], a person must supply one hour of labour, then money will be worth exactly that – one hour of labour"

Well what if govt offered $35/oz of gold and paid $35/hr, then somebody who had gold offered 2 ounces of gold per hour of labor which then the person could work for an hour for that person and get 2 ounces of gold and then go to the govt and get $70 for it....

Which would make the statement here: "Thus, ..... " NOT true... there is no "thus" here... ie it does not follow....

They are making the word 'currency' subject to "money!"... its not... the specific is never subject to the metonym...



GLH said...

Okay. Thanks

Simsalablunder said...

"Well what if govt offered $35/oz of gold and paid $35/hr"

Why are you dragging gold into a pure fiat discussion?

Matt Franko said...

HPM is not exclusive to fiat...

http://www.nber.org/chapters/c1642.pdf

peterc said...

Matt, the govt can set the value of the currency in terms of labor power or instead set it in terms of some other commodity, but not both. Once it chooses a particular commodity, the currency value is fixed in terms of that commodity. With a JG, the commodity chosen is labor power (i.e. the capacity to perform simple -- or minimum-wage -- labor time). The amount of gold or other commodity required to obtain a dollar will fluctuate. The amount of simple labor time required to obtain a dollar will not fluctuate so long as govt keeps the JG wage the same.

For instance, if the JG wage rate is $10/hr, the value of the currency would be 0.1 hours/dollar. Looked at the other way, one dollar will command 0.1 hours of the commodity labor power. But the amount a dollar commands of any other commodity will fluctuate.

Matt Franko said...

Well yes Peter but then why bring HPM into it today?

Its like they are saying, "Hollywood is putting out some bad movies, and Paramount Studios is part of Hollywood THUS... Paramount is putting out some bad movies...." it doesnt necessarily follow...

They go off the rails here because they for some reason want to "stand on the shoulders of giants"... so they for some reason want to bring in all of the old gold standard monetarist stuff from Keynes, Knapp and wtf "giants!" who didnt envision or theorize on anything that we are doing today with our public monopoly...

I dont get it... 'when the conditions change, I change my mind...' who said that too?

Simsalablunder said...

"HPM is not exclusive to fiat..."

You quote people who specifically talks about fiat in that text but YOU drag gold into it to prove that they're wrong?

Seems to me your stringent thinking is less so when your political bias takes over…

Tom Hickey said...

the govt can set the value of the currency in terms of labor power or instead set it in terms of some other commodity, but not both. Once it chooses a particular commodity, the currency value is fixed in terms of that commodity.

There can be only one numeraire. Government, as the monopoly issuer, can choose to set it, e.g., with a fixed exchange rate in terms of a commodity like gold, or what it pays for a "commodity" like an hour of unskilled labor.

However, in the Marxist analysis labor is not a commodity but rather the ultimate determinant of the value of commodities.

For a Marxist, the value of gold determines the value of the currency rather than vice versa even under a fixed rate and the value of gold is determined by the value of the socially necessary labor needed to produce a unit of it.

Without getting into the weeds of the difference between Marx's view of the LTV as opposed to Smith and Ricardo (see link above), the key point Marx was making is that labor is not a commodity. This is not only a matter of economics, but also social and political thought and ultimately ethics and ontology. Human life has a an entirely different category of value than goods produced for sale (commodities).

The mistake arises from confusing labor with goods because wage labor is also exchanged in markets for "money."

So this dispute is really key not only in economics but also political economy and philosophy.

peterc said...
This comment has been removed by the author.
peterc said...

(Sorry, had to delete and re-post with a couple of key phrases added in.)

Tom, I agree that labor is not a commodity. I am suggesting that the value of the currency under a JG is defined in terms of the commodity *labor power*, not *labor*. When govt pays the JG wage, it obtains access to the worker's capacity to work (labor power) for a specified period of time. It gets to determine how much labor power can be purchased with a dollar. But it does not get to control the amount of labor actually performed, which will depend on the intensity of labor. (Notice it will be the same if the govt chooses another commodity instead. It can dictate, for instance, that one dollar purchases x amount of gold, but this does not mean the govt can strictly control the value of - amount of (abstract, socially necessary) labor represented in - x amount of gold that a dollar purchases. The value of the gold purchased by a dollar would still fluctuate. It is the physical amount of gold that would be fixed.)

The labor/labor power distinction is central in Marx.

https://en.wikipedia.org/wiki/Labour_power#Labour_power_as_commodity

More generally, the value of a commodity is an amount of (abstract, socially necessary) labor. The worker is not paid the value s/he creates, but instead is paid the value of his/her labor power. So long as the value of labor power is set below the value created by workers in production, there is surplus value.

In the case of the JG, the pricing of (simple) labor power through the JG wage will influence the average level of wages in the economy as a whole -- a nominal price-anchoring effect. The higher the JG wage is set, the higher other wages will need to be to attract workers of varying degrees of skill.

Tom Hickey said...

Thanks for clarifying, Peter. I was hoping you would.

Matt Franko said...

Tom you are treading dangerously close to gold buggery....

jrbarch said...

When govt pays the JG wage, it obtains access to the worker's capacity to work (labor power) for a specified period of time. It gets to determine how much labor power can be purchased with a dollar. But it does not get to control the amount of labor actually performed, which will depend on the intensity of labor.

Am not sure I understand this: - there may be intensity of labour, but due to efficiencies different outcomes at the same intensity? Or quantitatively the same result, but qualitatively vastly different outcomes???? Then the actual value assigned to any of these outcomes, because it’s a human being doing the valuation, are subjective. (Natives will beat a rolls royce into spearheads; Hawaiians used to fatten their wives). So, we keep on coming up with these measuring sticks for expenditure of human energy when everything around us is shifting sand, and based on a conditioned perception of value? To which we want to assign a $symbol and standardise its meaning and significance. None of which we can take with us when we die. If I watch it too closely, the world makes me dizzy!

Tom Hickey said...

It's common to refer to a commodity numeraire as a standard of real value relative to the numeraire. Historically, the commodity numeraire has been gold and many people still use it as an indicator.

Real value over time is gauged in terms of the ratio between various economic goods and a fixed amount of gold. It is much more difficult to see long terms historical trends using nominal values expressed in units of account, e.g, the dominant unit of account at the time and region in question, and it is virtually impossible long term because of changes in monetary arrangements. And the long term relative value of gold is more available over long periods, as well as in ancient times.

A real numeraire can also be used to plot the shifting relative values of nominal units of account, which are hard to adjust accurately to changes in price level.

This use as a real numeraire in computation is categorically different from gold used as either a price anchor (a fixed exchange rate for currency) or an actual medium of exchange (exchange value in commodities markets).

Even though it is neither under current arrangement, gold as a real numeraire still conveys information.

Calgacus said...

Peterc- For practical purposes, the gov does "control the amount of labor actually performed" in a JG. The JG is for people who are ready, willing & able. Which is nearly all people of working age. The core of poverty everywhere is the (intentional, cruel, insane, fantastically destructive) disemployment of such people.

In a JG they won't be Heroes of JG Labor killing themselves through overwork. Nor will their labor be so random that the government will not be able to predict ("control") the amount of work performed (per worker), and therefore rationally plan projects. Saying otherwise amounts to the kind of baseless criticism of work programs like the New Deal's alphabet soup made from rightist - really pro-plutocratic - ideologies. So sure, there may be some surplus if one wants to look at it that way, but since the JG projects are for the whole society, including these workers, it won't be very meaningful or grow. IIRC the MMTers have considered and (rightly IMHO) dismissed such points.

People are overcriticizing GLH, what he said is not so wrong. More later.

peterc said...

My point was not to criticize a JG. Quite the opposite. (More on this below).

The labor/labor power distinction applies across the economy. It is not specific to the JG.

An employer -- any capitalist employer -- purchases an amount of labor power (which under capitalism, for Marx, is a commodity), not an amount of labor.

Nonetheless, Marx (Capital, Vol. I, Penguin edition, p. 137) maintained that, *on average*, an hour of living labor always creates the same value, whether in the past, present or (capitalist) future, irrespective of the level of productivity. (In contrast, the value preserved as dead labor and transferred to final output devalues over time due to improvements in productivity.)

The macro rule that an hour of *average* living labor always creates the same value implies that a given level of total employment always creates the same value.

This has an important implication for currency value. It means that by influencing the average wage, the government can influence the amount of *average* labor (not just labor power) forthcoming at that wage.

The JG wage is a method of achieving this. It is not complete control. Complete control would require setting all wages. But it is an anchor. The JG wage serves as a nominal price anchor because it influences all other wages in the economy, and therefore the average wage. Once the JG wage is set, other employers need to set wages that are competitive with it.

As a nominal price anchor, the JG wage is superior to a gold (or other commodity) standard.

If a government sets the value of a dollar to x amount of gold, it is basically asking (foolishly) for (domestic) currency *instability*. The amount of labor required to produce gold (and so the value of gold) fluctuates with every variation in productivity in gold production. Rather than being an effective macro-stabilization tool, the currency itself becomes subject to micro variations. The government will have fixed the currency's value to x amount of gold. But x amount of gold is not a stable measure of value, either in itself or in comparison with the average value of all commodities produced in the economy.

The JG wage, by defining currency value in terms of an amount of labor power, does not have this source of macro instability, courtesy of Marx’s macro rule that an hour of average living labor always creates the same value. This makes the value of the currency invariant to alterations in productivity. This is true both of micro variations in productivity (e.g. relative productivity changes in the gold sector) and macro variations.