Tuesday, May 26, 2015

The Horror of the Confidence Fairy (part v)

(From part iv)

(source)

"
[I]t was Keynes, not Marx, who cracked the code of crisis economics and explained how recessions and depressions can happen." (Paul Krugman, "Why Aren't We All Keynesians Yet?")
"A good way to understand the origins of the current economic crisis in Australia is to examine the historical behaviour of key macroeconomic aggregates." (Bill Mitchell, "The Origins of the Economic Crisis")
"Q: So uncertainty is the root cause of this unemployment equilibrium?
"A: No uncertainty is NOT central for unemployment. Lack of demand is, even if prices are flexible. (Matías Vernengo, "History versus Equilibrium: a False Dichotomy")
"Animal spirits -- also known as 'confidence' and 'expectations' -- are the main factor causing the economy to speed up and slow down, speed up and slow down again". (Ross Gittins, "Economy Follows Wherever our Moods Take us")
"It will not do to treat questions relating to economic policy, to trade and industry, and especially to population, as if they were metaphysical speculations in which each person can adopt the point of view which appeals most to his temperament -- and still more frequently, perhaps, to his private interests." (Knut Wicksell, here)

One thing is to figure out who the Confidence Fairy's estranged deadbeat dad is, another is to determine how much unpaid child support he owes her mother.

But here we shall not attempt that. Instead, let's try to understand how Animal Spirits explain recessions.

Things are bound to get interesting.

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Given the previous selection of opposing opinions, something must be clear: if Keynes "cracked the code of crisis economics and explained how recessions and depressions can happen," he took the secret to the grave.

From Mitchell's current non-Keynesian disregard for Animal Spirits (which I, for what it might be worth, applaud and share), to Vernengo's somewhat middle-of-the-road position, to Gittins' all-powerful Animal Spirits, there is an ample range of colours, sizes, and models to choose from.

(Bear with me on Gittins' inclusion in the list:  his position, influenced by the work of George Akerlof and Robert Shiller, is not all that different from Lord Skidelsky's and it can be contrasted with Keynes' own).

Paul Krugman's own stance seems closer to Vernengo's.

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(source)

After crafting the separate threads of his argument (Chapter 12 explaining Animal Spirits), Keynes weaves them in Chapter 18. His model has "given factors", independent variables and "volume of employment and the national income", as dependent variables.

After some preliminary considerations, Keynes: "Thus we can sometimes regard our ultimate independent variables as consisting of 
  1. the three fundamental psychological factors, namely, the psychological propensity to consume, the psychological attitude to liquidity and the psychological expectation of future yield from capital-assets
  2. the wage-unit (…) and 
  3. the quantity of money (…)"
A comparison between Keynes' uncertain attempts at psychologising -- at least as reflected in Chapter 12 and reinforced in the passage above -- and the thought of his contemporary followers would seem to indicate that Gittins' Keynesian interpretation (and Skidelsky's before his retraction) is the closer match!

Would that qualify as "metaphysical speculations"?

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Upon closer inspection, readers will note that Mitchell (a Post Keynesian economist strongly influenced by Marx) is explaining his own practice with no explicit reference to Keynes, let alone his Animal Spirits. A few years ago, he would still mention it -- with already palpable ambivalence. My guess is that experience has made Mitchell gradually drift away from the Master, at least on that: he, unlike Keynes, exclusively considers objective, measurable variables.

To the extent that quote is representative (and it may not be), Vernengo's position seems more ambiguous. Himself a Post Keynesian influenced both by Marx and Sraffa, one could expect his views on Animal Spirits to be closer to Mitchell's than to Gittins'. In fact, in that quote it's unclear whether he is explaining his own views, or those of Keynes (if the latter, I'm afraid he doesn't seem to be right).

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So, Prof. Krugman, Keynesian views on the cause of the current situation seem to run the whole gamut, from the materialist, to the extremely subjectivist -- or metaphysical, if you will. Not bad, for the "explanation" Keynes decoded.

Somehow, I'm reminded of Nikolai Bukharin: "[T]he motives of the isolated individual constitute the point of departure for the Austrian School".



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