Sunday, May 31, 2015

The Horror of the Confidence Fairy (part vi)

(From Part v)

"But the thing that is most needed now is something monetary policy can't directly cause: more of the sort of ‘animal spirits’ needed to support an expansion of the stock of existing assets." (Glenn Stevens, RBA Governor, here)
Lacking a theory of what causes slumps, Animal Spirits offer a convenient multipurpose explanation to the Keynesian economist: Animal Spirits strike unexpectedly, and create an exogenous, unpredictable shock to aggregate demand.

This is where Keynesian economists see themselves and the Government playing a role: they are there to counter, through fiscal and/or monetary policy, that shock.

With nuances and qualifications, many a Keynesian economist subscribes to the "Animal Spirits as imp who strikes once and is to be vanquished".
"But the goat, on which the lot fell to be the scapegoat, shall be presented alive before the Lord, to make an atonement with him, and to let him go for a scapegoat into the wilderness." (Leviticus 16:10. KJV)
Understandably so: it's convenient, neat and plausible.

----------
"There is always a well-known solution to every human problem -- neat, plausible, and wrong." (H.L. Mencken)
Other Keynesians -- particularly, Post Keynesians -- have taken issue with that view: it may be neat and plausible, but it's unfaithful to Keynes -- they argue -- therefore, it's wrong.

Again Ross Gittins, channelling the New Keynesians Akerloff and Shiller, gives a useful account of how Keynes' ideas were diluted and places the responsibility on Sir John R. Hicks' "efforts to make Keynesian thinking more acceptable to economists steeped in the neo-classical assumption" (here).

In Gittins' account, Hicks made the multiplier protagonist of Keynesian economics, leaving Animal Spirits out of the film, except for a cameo at the beginning of the story, "so they [Keynesian economists] could do what they thought mattered most, win support for Keynes's key policy prescription: the use of government spending to stimulate demand when it was deficient."

In what concerns Animal Spirits, that would have been Hicks' sin. In doing so, he created "the imp who strikes once and the avenging Keynesian economist" view.

Gittins' story seems more or less correct. Hicks, writing in "IS-LM: an Explanation":
"Neither of us [i.e. Keynes and himself] made any assumption about 'rational expectations'; expectations, in our models, were strictly exogenous. (Keynes made much more fuss over that than I did, but there is the same implication in my model also)."
So, perhaps Hicks did misinterpret or, at any event, misrepresent Keynes' ideas, particularly those regarding Animal Spirits/expectations: for Keynes -- the critics argue -- Animal Spirits played a much more central role.

They are probably right, as we've seen.

----------
"It will be admitted by the least charitable reader that the entertainment value of Mr. Keynes' General Theory of Employment is considerably enhanced by its satiric aspect." (Sir John Hicks, "Mr. Keynes and the 'Classics' ")
Before casting the first stone, however, put yourself in Sir John's shoes.

How would you have explicitly modelled the effect of "digestion", the "weather", "fear", "nerves", and "hysteria" on the decisions of the "average business man" (let alone convinced your readership that you were actually being serious)?

Would you have made a deliberate fuss over that?

And how would you have explicitly modelled the effects of activist policy on "the fear of a Labour Government or a New Deal" on the investment decisions of the "average business man"?

Keynes' Animal Spirits may work reasonably well as a self-referential joke, but, as Sir John may have understood, economic theoreticians are known for their dull sense of humour.



No comments:

Post a Comment