Saturday, 21 June 2014

Keynes2


Keynes2

Government of the People, by the Rich, for the Rich?

There is, I think, no disagreement that we are currently governed by the rich; and there can be little disagreement that it is for the rich. There may, however, be some division of opinion on the advantages for the bulk of the population of being so governed. I am going to argue that being governed for the rich is disastrous for the country, and that, given the force of natural prejudice, being governed by the rich (so for the rich) is also against the common interest. I should like to see a revival of the Common Wealth Party (q.v.)

The marginal propensity to consume.

JM Keynes, in "The General Theory of Employment, Interest and Money" (1936), discusses (among other things) our 'marginal propensity to consume', which can be visualised thus: If you give £100 to each person in the country, some would spend £99 (and doubtless buy a lottery ticket with the change), some would spend £50 and save the remainder and others would scarcely notice the gift. These would represent 'marginal propensities to consume' of 0.99, 0.5, and 0.001 respectively. Keynes points out that, in general, poor people tend to consume a large part of their income, and the rich tend to save (or invest) a large part.
         In Britain during the last two or three decades we have seen a marked increase in the gap between the very rich and the very poor. Worse still, we are seeing an ever larger fraction of GDP going into the hands of well-off people. This would be galling enough if the well-off spent that money; but at least then it would cascade down the social scale, and the makers of smart cars, their chauffeurs, their petrol-pump attendants and their skivvies would all benefit. But if the rich merely sit on their money (or lend it out at interest, or use it to buy out competitors) it is very damaging to the economy; the country goes into recession; we all sit around waiting for signs of recovery, from someone else. We need the 'multiplier' effect. In the classical phrase "supply creates its own demand"; meaning that, in aggregate, everything that is sold has to be bought; and buyers must sell something if they are to be able to buy.
         I am not crying for astronomical rates of income tax. Nor is this an anti-business agenda. Indeed it is a pro-business agenda, because it is arguing for the importance of markets for enterprises. But it is indeed an anti-rich agenda. The money has to be recirculated somehow. If they are smart, the rich will spend it and enjoy it. Otherwise it has to be taken off them by some means or other; by VAT, by domestic rates on large properties (whether lived in or not), and finally, if any remains, when they die. (Rich sons are not noted for their enterprise.)
         Unless you are yourself significantly wealthy you should not vote for the party of private wealth.

Wednesday, 18 June 2014

Keynes1

The difficulty of Keynes's Style

While greatly admiring the clarity and confidence of Keynes's thinking I am very critical of the obscurity of his style and the impediment that raises to a close reading of his important book: John Maynard Keynes* (1936), "The General Theory of Employment, Interest and Money" (readable online). Take (for example) the following from chapter 8.
"Since we are here concerned in determining what sum will be spent on consumption when employment is at a given level, we should, strictly speaking, consider the function which relates the former quantity (C) to the latter (N)."
The 'here' is mere pedantry. And the definitions of C and N are unnecessarily delayed. Given that, in English grammar, 'which' describes while 'that' defines, I conclude that JMK has a tendency to confuse the two. So try:
Since we are concerned in determining what sum will be spent on consumption (C) when employment (N) is at a given level, we should, strictly speaking, consider the function that relates the two.
Another example of the that/which problem (from chapter 2):
"....; whereas they do not resist reductions of real wages, which (that) are associated with increases in aggregate employment and leave relative money-wages unchanged, unless the reduction proceeds so far as to threaten a reduction of the real wage below the marginal disutility of the existing volume of employment."
I submit that not all reductions of real wages are of the sort described, so the 2nd clause is a 'definition', a necessary limitation, and not a 'description'.

Take that obscure but important of definitions in Chapter 2 — that of "involuntary unemployment". Unless you understand this you do not understand Keynes:
"Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment. "
Keynes's "would be" throws me, as it flouts the Humpty-Dumpty rule on conditionals ('If the number were greater the men would be unemployed'). Which men? No-one has been sacked, so are we talking about men currently idle by choice, who wish to become employed because of a rise in real prices, but who cannot find a job (except at a wage below the current)? (I do not see the force of this. Will not the classical school say that there is nothing to stop these men taking a lower wage (unless it be collective bargaining)?) What is the 'aggregate demand for labour'? Does Keynes mean that the entrepreneurs are seeking workers? So, why does not the 'existing volume of employment' increase if there is both rising demand and supply? Are we merely talking about a time lag; the supply and demand for labour go up, but the jobs do not appear immediately? However, we all know that there are people seeking work during a 'depression', and we suspect it is because the entrepreneurs do not see a market for further product.

I find (to my amusement) that people write books* about this important concept of the 'involuntarily unemployed', and the obscurity of Keynes's writing.

References:
1.  John Maynard Keynes (1936), "The General Theory of Employment, Interest and Money"
2.  G. L. S. Shackle (1983) The Years of High Theory: Invention and Tradition in Economic Thought 1926-1939.


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Wednesday, 4 June 2014

Interest Rates


Interest Rates


I have been trying to follow the argument of Gerardo Coco in his interesting, but confusing, piece posted on the Cobden Centre website. I wonder if I have got the gist of his argument in the two short paragraphs below. 

Interest rates have to play several different roles.
(1) The first role that springs to mind is that of indicating the price of credit; interest being a regular (e.g. annual) fee paid to the lender for the temporary use of his capital. This capital may be invested in a productive investment, to buy tools, or a mill, or an extra field. A rational investor will pay no more in interest than he can gain (per annum) from his investment. Good times will allow interest rates to rise, and conversely bad times will hold interest rates down.
(2) For some people liquidity is the problem; they want cash in hand, not to invest, but to pay the bills. Their desperation will determine the upper limit of the interest rate they will pay. Let us call this process of turning credit into cash 'discounting'.
(3) People have grown to expect money to breed, to yield an annual income. The relationship between capital and income is of course the interest rate. There is a backwards way of thinking which says "My assets yield £100 a year; interest rate is 1%; so my assets are worth £10,000."  If interest rates were 5% I would value my assets at a mere £2,000. A form of this argument may be driving up current house prices; "My house is worth £300,000 and I can afford a mortgage (at 6%) costing £18,000 per annum. If mortgage rates drop to 3% I can sell my house for twice as much."
(4)  Central banks use their 'base rate' as a means (essentially their only means) of controlling the money supply, and with it the 'growth of the economy', 'unemployment', and 'inflation'.

It is hard for a single 'Interest Rate' to fulfill all the roles required of it. It is true that Bank Base Rate does not impinge directly on the high street borrower, for the normal citizen cannot borrow money at the present comically low rate of 0.5%. But it remains a problem that a lender does not always know to whom he is lending and for what purpose. If Central Banks set a very low interest rate, some entrepreneurs may borrow money (as it is so cheap); but others will conclude that 'times are bad' for investing and consequently will wait for better times. The Bank's one available signal of Bank Base Rate can have a damaging effect while trying to have a stimulatory effect.