Sunday, May 24, 2015

Bits and Pieces (VI)


Without mentioning her by name, Keynesian economist Paul Krugman ("Conservatives and Keynes", May 5, 2015) writes on the Confidence Fairy.

In my opinion, whether he realizes it or not, this is the key part of his post:
"Keynesian economics, if true, would mean that governments [and economists, I'd add] don't have to be deeply concerned about business confidence, and don't have to respond to recessions by slashing social programs."
However, can you write "Keynesian economics" without "Animal Spirits"?

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One who would probably deny that is Prof. Roger Farmer (Distinguished Professor of Economics, at UCLA, apparently a non-Post Keynesian economist): he proposes the adoption of Animal Spirits as a new fundamental for Keynesian economics.

In a post ("Rational Expectations and Animal Spirits", February 3, 2014) last year, Farmer had this to say about his work:
"In standard dynamic stochastic general equilibrium (DSGE) models there is a single rational expectations equilibrium. In the models I work with there are many rational expectations equilibria. Not just one, or two or three: but an infinite dimensional continuum of them. That is not a problem. It is an opportunity that I exploit to model the idea that beliefs matter. In my work, I close my models by adding an equation that I call a 'belief function'. The belief function is an effective way of operationalizing the Old Keynesian assumption of 'animal spirits'. It is a forecasting rule that explains how people use current information to predict the future. That rule replaces the classical  assumption that the quantity of labor demanded is always equal to the quantity of labor supplied."
Now (and this is the thing), how would that fit with Keynes' -- the oldest Keynesian -- Animal Spirits, is something I cannot fathom. To paraphrase Him (about whose words I was reminded recently): "I simply do not know".

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Incidentally, Paul Krugman alludes to Farmer in "Choose Your Heterodoxy" (25-04-2015). An appropriate title, no doubt. But that's not why I draw your attention to it. What caught my eye is this:
"As I've written many times, economists who knew their Hicks have actually done extremely well at predicting the effects of monetary and fiscal policy since the 2008 crisis, whereas those who sneered at this old-fashioned stuff have been wrong about almost everything."
So, economists -- at least those who "know their Hicks" -- can predict things extremely well.

Fair enough. One is entitled to bragging rights if one makes a prediction and it comes to pass. Why should that be interesting?

Well, because other Keynesian economists (like Wren-Lewis and Syll) say economic prediction is not possible. In fact, neoclassical Marxist Chris Dillow agrees with them on that:
"Macroeconomics - when done well, which is only some of the time - does the former [explanation]. This might be all that can be expected. Whatever else is wrong with macro theory, the inability to foresee recessions is not the problem." 
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Is that just me, or these are strange times?

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UPDATE:

(source)

I couldn't hope for a better way to illustrate my previous comment on the strangeness of our times than pointing to "Das Kapital at the Arsenale: how Okwui Enwezor Invited Marx to the Biennale", by Charlotte Higgins (h/t David Ruccio), on the public readings of Das Kapital in the Venice Biennale.

Thursday, May 21, 2015

The Horror of the Confidence Fairy (part iv)

(From Part iii)

"Who is John Galt?" (Ayn Rand, "Atlas Shrugged")
"This is the best chapter in the book and one of the most important economics essays of all time." (Tyler Cowen, "Keynes’s *General Theory*, chapter 12" or here)
"Bukharin was right when he stressed that the [subjectivist] marginalist school adopts the point of view of the rentier". (Ernest Mandel, "The Marginal Theory of Value and Neo-Classical Political Economy")

Whether you call her Confidence Fairy, Regime Uncertainty, or Animal Spirits, her father, Keynes, introduced her to the history of economic thought in Chapter 12 of his masterpiece ("animal spirits - of a spontaneous urge to action rather than inaction") and explained her significance one paragraph later:
"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."

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It doesn't take a literary critic to perceive in Keynes' ode to the subjectivity of the all-important, powerful and benevolent, if fickle, "average business man" a self-satisfied worldview which had barely changed in twelve years, since the publication of "A Short View of Russia". Keynes (like Ayn Rand and Ludwig von Mises) sees the capitalist as the economic demiurge, whose broad shoulders sustain the world he alone created:
"How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeois and the intelligentsia who, with whatever faults, are the quality in life and surely carry the seeds of all human advancement?"
Nor does it take a psychologist to suspect Chapter 12 to be highly introspective, self-descriptive, almost confessional, with its constant appeals to personal experience ("We know from extensive experience … Nor can we rationalise our behaviour …") and even his own personal petty phobias (he explained one year later his "fear of a Labour Government": "It is a class party, and the class is not my class", that made of the Labour Party the "Party of Catastrophe" in "Am I a Liberal?").

In both passages Keynes, the financial speculator -- or rentier, if you prefer -- more than addressing academics, is addressing his fellow Olympians, the financial capitalist and the bourgeois, in general -- whom Rand illustrated with John Galt, the demi-god who, reacting to their impositions, could destroy the world of the moochers by his mere absence.

There is a strong family resemblance between Confy and her dad. Perhaps Rand should have given Keynes a second thought.

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The spontaneously generous encomium this chapter receives from leading libertarian economist Tyler Cowen may surprise at first, but is not gratuitous:
"This is the best chapter in the book and one of the most important economics essays of all time.  …
"Upon rereading it, I am overwhelmed by its insight and also its relevance to our current
[i.e. April 30, 2009] predicament." (here or here)

(To be continued)