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As well as economics, you can add sociology, political science, anthropology, various historical scholarship etc etc. One of the greatest minds in history. Smith also pilfered some famous lines from Khaldun, too. A giant standing on the shoulders of another giant...
The part that really stood out to me was the bit about Ronald Reagan and Art Laffer claiming they got inspiration from Khaldun as well, though where they were coming from couldn't be any more different than what Khaldun had originally thought. Hell, I love the part about Khaldun being so ahead of his time, he already worked out the basic premises we'd see from both Marx and Keynes. Thanks for posting this, Tom. I learned quite a lot here.
Re the idea that government spending raises aggregate demand, that can be traced back even further: they had a credit crunch in Ancient Rome sparked off by - guess what - yes, it was a property bubble which burst.! They solved the problem by opening up the treasury coffers and spending the contents.
In actual fact, Art Laffer was very clear who had inspired him. He explained that in "The Laffer Curve: Past, Present, and Future" (June 1, 2004), kindly made available to the public by The Heritage Foundation. http://www.heritage.org/taxes/report/the-laffer-curve-past-present-and-future
There Laffer says: "The Laffer Curve, by the way, was not invented by me". And he does mention Ibn Khaldun.
But Khaldun is not his only muse. No siree.
Next, Laffer quotes "a more recent version (of incredible clarity)" of the same Khaldunian argument:
"When, on the contrary, I show, a little elaborately, as in the ensuing chapter, that to create wealth will increase the national income and that a large proportion of any increase in the national income will accrue to an Exchequer, amongst whose largest outgoings is the payment of incomes to those who are unemployed and whose receipts are a proportion of the incomes of those who are occupied...
Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more--and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss."
Guess who is the author of that incredibly clear version?
John Maynard Keynes ("The Means to Prosperity", 1933): https://gutenberg.ca/ebooks/keynes-means/keynes-means-00-h.html
I forgot to mention, but the Keynesian origins of supply side economics is one of the reasons why Bruce Bartlett, the well-known American conservative, is one of Keynes' fans, perhaps the only one among conservatives.
Over the years he has explained his position numerous times. Here's two:
"Keynes as Conservative" (Modern Age, no. 28, pp.128-33 http://www.mmisi.org/ma/28_2-3/bartlett.pdf
"Keynes Was Really a Conservative" (Forbes, August 14, 2008) http://www.forbes.com/2009/08/13/john-maynard-keynes-conservative-opinions-columnists-bruce-bartlett.html
In the first he mentions the role Keynes played inspiring Laffer.
However, the model is restrictive. It includes the assumption of a closed economy of a private sector and government so that the funds made available flow to investment in the economy, provided that the return on investment is greater than on saving of comparable risk, or that liquidity preference doesn't impinge on investment desire.
In open economies with free capital flow, the funds make available for investment will flow to the maximum return on capital, which has and continues to be emerging economies.
This is likely even true within a currency unions such as the states of the United States. The expected investment in Kansas never materialized from the Brownback tax cuts, and the program was just scuttled by the GOP legislature over the governor's veto. While the governor claimed that the policy had not been in effect long enough, the legislature said "Enough" anyway. If the return on investment in KS was lower than other states, the investment funds made available by the tax cuts would rationally flow there.
So the assumptions of the theoretical model must be qualified by supervening conditions.
However, the model is restrictive. It includes the assumption of a closed economy of a private sector and government so that the funds made available flow to investment in the economy, provided that the return on investment is greater than on saving of comparable risk, or that liquidity preference doesn't impinge on investment desire.
Maybe so, but -- correct me if I'm wrong, it's been a while since I read that essay -- doesn't Keynes mention the word "import"... nine times in that essay? Wouldn't that mean he did not assume a closed economy?
For that matter, why should that model be more restrictive than the other more popular model in the General Theory?
Maybe so, but -- correct me if I'm wrong, it's been a while since I read that essay -- doesn't Keynes mention the word "import"... nine times in that essay? Wouldn't that mean he did not assume a closed economy?
The issue is exporting capital. This is the issue now.
Firms are investing in factories abroad and then importing goods and embedded labor.
Giving them tax cuts without strings enables this, which, after all, is rational economically since capital flows to the maximum risk-weighted return.
The way around it is to give tax cuts to corporations for investing locally.
That way the tax cut is supported by local spending and an increase in local jobs.
The issue is exporting capital. This is the issue now.
I see. So, that's the issue now.
So, the issue, then, was not that the economy in the Laffer/Keyness model was closed, but that capitalists export capital to emerging economies, where they get more bang for their buck.
But if that's the case, then higher taxes in the US should not enable capital outflows: taxes in the US have no way to make investment in, say, China, more profitable. Chinese workers won't worker any harder depending on tax rates in US. Maybe I'm being myopic, but I can't see how the availability of iron ore in the Pilbara has anything to do with US taxes, or why land in Argentina should yield more or less wheat depending on the US tax code, the IRS, or the weather in the prairies.
In fact, by cutting taxes in the US the US government allows capitalists resident in the US to keep more of their profits. Shouldn't they feel tempted to invest more?
----------
You see, taxes, like savings, are leaks from the circular flow of the economy. Reduce leaks, increase income.
This is the Keynesian income determination model:
Yo = (Co+Io+Go)/[1-c*(1-t)]
The notation is the standard one (Yo is the equilibrium income level. Go, Co, Io are respectively autonomous government, consumption and investment expenditure. c is the marginal propensity to consume and t is the marginal effective tax rate.)
The multiplier (m) is
m = 1/[1-c*(1-t)]
Cut t, leaving c unchanged, and the multiplier goes up, for the same level of aggregate demand. Say, if c = 0.8 and t = 0.2 then the multiplier is 2.78. Cut t to 0.1 leaving c unchanging at 0.8 and the multiplier goes up to 3.57.
That model comes from the General Theory. Are you disowning the Book of Maynard? :-)
I don't disagree with you about Keynes, but Laffer did not go there.
Laffer's simple explanation is closer to Khaldun than Keynes, who he brings in as an aside, although his Keynes quote is on point. However, I suspect that Laffer's quote of Keynes's emphasis on tax cuts promoting investment was about the extent of his use of Keynes in his supply side theory. I don't see Laffer endorsing the General Theory here, and his work, from what I know of it, seems to bear this out. After all, he was a professor at the University of Chicago. Supply-side = investment.
Laffer is most interested, it seems from his quote, in the primary emphasis Keynes placed on investment as the driver of a capitalist economy. The interest of Keynes in effective demand was to maintain investment sufficient for full employment.
The General Theory is about investment. Keynes recognized that growth is a function of capital investment. Employment is a function of growth. Continuing full employment of a growing population requires commensurate economic growth, and an increasing living standard requires increase productivity, which comes chiefly from tech innovation.
For Keynes, effective demand is needed for continuing full employment, so either the external sector or government has to make up for demand leakage to saving in the domestic private sector, to prevent unplanned inventory, which is counted as investment. Keynes pointed out that firms do not reduce price but rather quantity when unplanned inventory builds. So another sector has to provide the means for purchasing the inventory or the economy will slow and unemployment will increase. But Laffer doesn't mention this.
The idea of the Khaldun-Laffer curve is that tax cuts are spent, which produces growth which leads to more taxes in the end than would otherwise be the case.
While I haven't read more than the Khaldun quotes, he was thinking about spending in general, rather than differentiating spending into investment and consumption. Laffer placed more emphasis on investment than consumption, which is why "supply-side."
The Laffer curve purports to show that tax cuts will increase spending, significantly investment, which will lead to growth, and as a consequence, higher tax revenues subsequently than otherwise. Translation: Tax cuts more than pay for themselves while growing the pie, so everyone benefits from the rising tide lifting all boats.
Laffer is assuming a more or less closed economy operating under Say's law, where money is a hot potato and saving is irrelevant, since all saving is eventually spent in the economy, and one person's saving is another's borrowing to spend in the current period. In this view there is no significant leakage to saving, money being neutral in the long run. And investment is chiefly domestic. This is a simple circular flow model.
Theory aside, tax cuts lead to greater net profits than otherwise, so the question becomes what happens to the profit. Growth companies invest in growth, and blue chips increase their dividend, in theory anyway. The portion of growth that is realized in period will be taxed as income or capital gains. Dividends will be taxes as ordinary income. Some of this will be spent on consumption, some invested and some saved. The amount saved has the same effect on the economy as it would if taxed — none. So at even this level it is difficult to say in advance how the profits will be distributed.
Matters are quite different now from even when Laffer was first writing, let alone at the time of Khaldun, or even Keynes. Stock buybacks have become a significant use of profits, for example. In addition, there is much more capital investment in emerging economies than when Laffer was first writing. Moreover, saving desire is historically high. Finally, there is little opportunity for gain in domestic investment compared with trading in existing assets, which is a form of saving.
In fact, by cutting taxes in the US the US government allows capitalists resident in the US to keep more of their profits. Shouldn't they feel tempted to invest more?
That's Laffer's rationale.
But why would a rational person invest here in the US when they can be make a better risk-weighted return either investing abroad or else trading existing assets like equities, or buying up cheap RE and renting it in expectation of future appreciation?
The big problem in the US now is lack of domestic investment that is competitive. It's not that people with funds available for domestic investment don't want to invest. They don't see investment opportunities here that are competitive with other opportunities.
I don't disagree with you about Keynes, but Laffer did not go there.
Laffer's simple explanation is closer to Khaldun than Keynes, who he brings in as an aside, although his Keynes quote is on point.
Give me a break. It's not closer to Khaldun, particularly after you recognised you are not too familiar with Khaldun. There's no way you can leave that parcel on Khaldun's door.
Laffer did go there: he quoted a work where Keynes made his (Laffer's) case for Laffer. It was an extense quote (against Khaldun's, which was much briefer and less specific). If one wants to see Keynes as a kind of theoretician of the welfare state, one may not like it, but there's no way around it. It's there, in black and white.
Not only that, but the case Keynes made in Means to Prosperity is consistent with his income determination model from the General Theory. Again, one may not like it, but there's no way around it.
The thing is that people want to construe Keynes into some kind of "socialist" figurehead. But it doesn't work like that. One can't pick and choose: I take only those bits that I like, those that agree with my ideology, and ignore those that don't.
In that Bartlett, the conservative columnist, has a point: Keynes' economics aren't clearly liberal, or leftist, or "social democratic". The fact he had ties to Chicago may not sound good to you, but that doesn't prove Laffer's argument did not come from Keynes.
Sorry.
----------
Incidentally, Bartlett is not the only "inconvenient" Keynesian fan. For other reasons, Tyler Cowen, too, is also a fan.
14 comments:
As well as economics, you can add sociology, political science, anthropology, various historical scholarship etc etc. One of the greatest minds in history. Smith also pilfered some famous lines from Khaldun, too. A giant standing on the shoulders of another giant...
The part that really stood out to me was the bit about Ronald Reagan and Art Laffer claiming they got inspiration from Khaldun as well, though where they were coming from couldn't be any more different than what Khaldun had originally thought. Hell, I love the part about Khaldun being so ahead of his time, he already worked out the basic premises we'd see from both Marx and Keynes. Thanks for posting this, Tom. I learned quite a lot here.
He invented double-entry accounting, which the Italians purloined as a European invention in the 14th or 15th C.
Re the idea that government spending raises aggregate demand, that can be traced back even further: they had a credit crunch in Ancient Rome sparked off by - guess what - yes, it was a property bubble which burst.! They solved the problem by opening up the treasury coffers and spending the contents.
In actual fact, Art Laffer was very clear who had inspired him. He explained that in "The Laffer Curve: Past, Present, and Future" (June 1, 2004), kindly made available to the public by The Heritage Foundation.
http://www.heritage.org/taxes/report/the-laffer-curve-past-present-and-future
There Laffer says: "The Laffer Curve, by the way, was not invented by me". And he does mention Ibn Khaldun.
But Khaldun is not his only muse. No siree.
Next, Laffer quotes "a more recent version (of incredible clarity)" of the same Khaldunian argument:
"When, on the contrary, I show, a little elaborately, as in the ensuing chapter, that to create wealth will increase the national income and that a large proportion of any increase in the national income will accrue to an Exchequer, amongst whose largest outgoings is the payment of incomes to those who are unemployed and whose receipts are a proportion of the incomes of those who are occupied...
Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more--and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss."
Guess who is the author of that incredibly clear version?
John Maynard Keynes ("The Means to Prosperity", 1933):
https://gutenberg.ca/ebooks/keynes-means/keynes-means-00-h.html
I forgot to mention, but the Keynesian origins of supply side economics is one of the reasons why Bruce Bartlett, the well-known American conservative, is one of Keynes' fans, perhaps the only one among conservatives.
Over the years he has explained his position numerous times. Here's two:
"Keynes as Conservative" (Modern Age, no. 28, pp.128-33
http://www.mmisi.org/ma/28_2-3/bartlett.pdf
"Keynes Was Really a Conservative" (Forbes, August 14, 2008)
http://www.forbes.com/2009/08/13/john-maynard-keynes-conservative-opinions-columnists-bruce-bartlett.html
In the first he mentions the role Keynes played inspiring Laffer.
Laffer is, of course, correct theoretically.
However, the model is restrictive. It includes the assumption of a closed economy of a private sector and government so that the funds made available flow to investment in the economy, provided that the return on investment is greater than on saving of comparable risk, or that liquidity preference doesn't impinge on investment desire.
In open economies with free capital flow, the funds make available for investment will flow to the maximum return on capital, which has and continues to be emerging economies.
This is likely even true within a currency unions such as the states of the United States. The expected investment in Kansas never materialized from the Brownback tax cuts, and the program was just scuttled by the GOP legislature over the governor's veto. While the governor claimed that the policy had not been in effect long enough, the legislature said "Enough" anyway. If the return on investment in KS was lower than other states, the investment funds made available by the tax cuts would rationally flow there.
So the assumptions of the theoretical model must be qualified by supervening conditions.
However, the model is restrictive. It includes the assumption of a closed economy of a private sector and government so that the funds made available flow to investment in the economy, provided that the return on investment is greater than on saving of comparable risk, or that liquidity preference doesn't impinge on investment desire.
Maybe so, but -- correct me if I'm wrong, it's been a while since I read that essay -- doesn't Keynes mention the word "import"... nine times in that essay? Wouldn't that mean he did not assume a closed economy?
For that matter, why should that model be more restrictive than the other more popular model in the General Theory?
Maybe so, but -- correct me if I'm wrong, it's been a while since I read that essay -- doesn't Keynes mention the word "import"... nine times in that essay? Wouldn't that mean he did not assume a closed economy?
The issue is exporting capital. This is the issue now.
Firms are investing in factories abroad and then importing goods and embedded labor.
Giving them tax cuts without strings enables this, which, after all, is rational economically since capital flows to the maximum risk-weighted return.
The way around it is to give tax cuts to corporations for investing locally.
That way the tax cut is supported by local spending and an increase in local jobs.
The issue is exporting capital. This is the issue now.
I see. So, that's the issue now.
So, the issue, then, was not that the economy in the Laffer/Keyness model was closed, but that capitalists export capital to emerging economies, where they get more bang for their buck.
But if that's the case, then higher taxes in the US should not enable capital outflows: taxes in the US have no way to make investment in, say, China, more profitable. Chinese workers won't worker any harder depending on tax rates in US. Maybe I'm being myopic, but I can't see how the availability of iron ore in the Pilbara has anything to do with US taxes, or why land in Argentina should yield more or less wheat depending on the US tax code, the IRS, or the weather in the prairies.
In fact, by cutting taxes in the US the US government allows capitalists resident in the US to keep more of their profits. Shouldn't they feel tempted to invest more?
----------
You see, taxes, like savings, are leaks from the circular flow of the economy. Reduce leaks, increase income.
This is the Keynesian income determination model:
Yo = (Co+Io+Go)/[1-c*(1-t)]
The notation is the standard one (Yo is the equilibrium income level. Go, Co, Io are respectively autonomous government, consumption and investment expenditure. c is the marginal propensity to consume and t is the marginal effective tax rate.)
The multiplier (m) is
m = 1/[1-c*(1-t)]
Cut t, leaving c unchanged, and the multiplier goes up, for the same level of aggregate demand. Say, if c = 0.8 and t = 0.2 then the multiplier is 2.78. Cut t to 0.1 leaving c unchanging at 0.8 and the multiplier goes up to 3.57.
That model comes from the General Theory. Are you disowning the Book of Maynard? :-)
I don't disagree with you about Keynes, but Laffer did not go there.
Laffer's simple explanation is closer to Khaldun than Keynes, who he brings in as an aside, although his Keynes quote is on point. However, I suspect that Laffer's quote of Keynes's emphasis on tax cuts promoting investment was about the extent of his use of Keynes in his supply side theory. I don't see Laffer endorsing the General Theory here, and his work, from what I know of it, seems to bear this out. After all, he was a professor at the University of Chicago. Supply-side = investment.
Laffer is most interested, it seems from his quote, in the primary emphasis Keynes placed on investment as the driver of a capitalist economy. The interest of Keynes in effective demand was to maintain investment sufficient for full employment.
The General Theory is about investment. Keynes recognized that growth is a function of capital investment. Employment is a function of growth. Continuing full employment of a growing population requires commensurate economic growth, and an increasing living standard requires increase productivity, which comes chiefly from tech innovation.
For Keynes, effective demand is needed for continuing full employment, so either the external sector or government has to make up for demand leakage to saving in the domestic private sector, to prevent unplanned inventory, which is counted as investment. Keynes pointed out that firms do not reduce price but rather quantity when unplanned inventory builds. So another sector has to provide the means for purchasing the inventory or the economy will slow and unemployment will increase. But Laffer doesn't mention this.
The idea of the Khaldun-Laffer curve is that tax cuts are spent, which produces growth which leads to more taxes in the end than would otherwise be the case.
While I haven't read more than the Khaldun quotes, he was thinking about spending in general, rather than differentiating spending into investment and consumption. Laffer placed more emphasis on investment than consumption, which is why "supply-side."
The Laffer curve purports to show that tax cuts will increase spending, significantly investment, which will lead to growth, and as a consequence, higher tax revenues subsequently than otherwise. Translation: Tax cuts more than pay for themselves while growing the pie, so everyone benefits from the rising tide lifting all boats.
Laffer is assuming a more or less closed economy operating under Say's law, where money is a hot potato and saving is irrelevant, since all saving is eventually spent in the economy, and one person's saving is another's borrowing to spend in the current period. In this view there is no significant leakage to saving, money being neutral in the long run. And investment is chiefly domestic. This is a simple circular flow model.
Theory aside, tax cuts lead to greater net profits than otherwise, so the question becomes what happens to the profit. Growth companies invest in growth, and blue chips increase their dividend, in theory anyway. The portion of growth that is realized in period will be taxed as income or capital gains. Dividends will be taxes as ordinary income. Some of this will be spent on consumption, some invested and some saved. The amount saved has the same effect on the economy as it would if taxed — none. So at even this level it is difficult to say in advance how the profits will be distributed.
Matters are quite different now from even when Laffer was first writing, let alone at the time of Khaldun, or even Keynes. Stock buybacks have become a significant use of profits, for example. In addition, there is much more capital investment in emerging economies than when Laffer was first writing. Moreover, saving desire is historically high. Finally, there is little opportunity for gain in domestic investment compared with trading in existing assets, which is a form of saving.
In fact, by cutting taxes in the US the US government allows capitalists resident in the US to keep more of their profits. Shouldn't they feel tempted to invest more?
That's Laffer's rationale.
But why would a rational person invest here in the US when they can be make a better risk-weighted return either investing abroad or else trading existing assets like equities, or buying up cheap RE and renting it in expectation of future appreciation?
The big problem in the US now is lack of domestic investment that is competitive. It's not that people with funds available for domestic investment don't want to invest. They don't see investment opportunities here that are competitive with other opportunities.
I don't disagree with you about Keynes, but Laffer did not go there.
Laffer's simple explanation is closer to Khaldun than Keynes, who he brings in as an aside, although his Keynes quote is on point.
Give me a break. It's not closer to Khaldun, particularly after you recognised you are not too familiar with Khaldun. There's no way you can leave that parcel on Khaldun's door.
Laffer did go there: he quoted a work where Keynes made his (Laffer's) case for Laffer. It was an extense quote (against Khaldun's, which was much briefer and less specific). If one wants to see Keynes as a kind of theoretician of the welfare state, one may not like it, but there's no way around it. It's there, in black and white.
Not only that, but the case Keynes made in Means to Prosperity is consistent with his income determination model from the General Theory. Again, one may not like it, but there's no way around it.
The thing is that people want to construe Keynes into some kind of "socialist" figurehead. But it doesn't work like that. One can't pick and choose: I take only those bits that I like, those that agree with my ideology, and ignore those that don't.
In that Bartlett, the conservative columnist, has a point: Keynes' economics aren't clearly liberal, or leftist, or "social democratic". The fact he had ties to Chicago may not sound good to you, but that doesn't prove Laffer's argument did not come from Keynes.
Sorry.
----------
Incidentally, Bartlett is not the only "inconvenient" Keynesian fan. For other reasons, Tyler Cowen, too, is also a fan.
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