“In the Long Run We Are All Dead” What Does It Mean?

June 28, 2010

by Mario Rizzo 

Paul Krugman continues to invoke Keynes’s famous statement. I wish Krugman and others would give some serious thought about what it is supposed to mean and the errors it involves.   

In the first place, Keynes was complaining about the “classical” economics, that is, the ideas of the economists before him who believed that the market, if unhampered after a recession, could reduce or eliminate the unemployment associated with the business cycle.  

Of course, this puts many economists – with different ideas – in the same category and treats the issue of cyclical unemployment in a grossly simplified way. But this, in general, is how Keynes treated those who disagreed with him. Keynes, the polemicist, was without inhibition. 

Some basic methodology is in order. When economists talk about “the long run” they do not mean calendar time. Yes, that’s right. They do not mean long in the sense of many years or perhaps even many decades. (On this see Fritz Machlup, ”Equilibrium and Disequilibrium: Misplaced Concreteness and Disguised Politics,Essays in Economic Semantics (1963))  

Then what do they mean? It is actually a technical term that has meaning only in the context of a specific model. I believe that Keynes knew this but used the everyday meaning of the term to sow confusion about the ideas of his predecessors and to use that to his advantage. 

The long run happens when all of the variable elements in a model are fully adjusted. It is an intellectual experiment. Suppose, simply, that a model says there are firms which face prices, make quantities of outputs and have a certain size. Now let the “permanent” demand for their product increase. Firms will face higher prices and their outputs will increase. But until firm-capacity is adjusted, there is no long run. Not everything in the model has adjusted. 

Will this complete adjustment take a long (calendar) time? Maybe or maybe not. It will depend on many specific circumstances in the industry. It could be extremely rapid.  

The impression that Krugman wants to convey is that only the stimulus-crowd wants to make things better now. The opponents, on the other hand, want to let present suffering continue as they fear some possible problems in the distant future of calendar time.  

But let’s look at the arguments made by the opponents of fiscal stimulus.  

Some have argued that, as deficits increase, people now offset the putative stimulus by increasing their savings in anticipation of future tax increases. So there is no stimulus now.  

Others have argued that, for example, extending unemployment insurance (again) to those unemployed for more than six months will increase the length of unemployment now (by subsidizing it) while failing to stimulate.  

The stimulus failure is due to the relatively small increase in spending induced by non-permanent increases in income (as unemployment insurance is certainly not permanent source of income). Even more, producers know that the spending is non-permanent so it is unlikely to result in increased employment of labor. Thus, there is no stimulus now; in fact if unemployment continues there is a kind of anti-stimulus now.  

Austrians have argued that failing to allow the housing market to adjust by both fiscal and monetary propping-up measures, worsens the situation now by prolonging the inevitable adjustment to a bubble sector. As the adjustment is dragged out and the rest of the economy suffers the dampening effects now. This must include the uncertainty as to when (in calendar time) the market will be allowed to adjust. 

In empirical work, John Taylor finds that to the extent there was some effect of the fiscal stimulus it was very small and lasted only a matter of two or three months for each major injection. So I guess the long run is four or five months by this reckoning:  

Compared with the 2008 stimulus, the 2009 stimulus was larger, but the amount paid in checks was smaller and more drawn out. Nevertheless, there is still no noticeable effect on consumption. I also show the timing of the “Cash for Clunkers” program in Figure 7; it did encourage some consumption, but did not last and cannot be considered an effective method to stimulate the economy. In addition, my analysis of the government spending part of the stimulus is that it too had little positive impact.

Even frameworks that stress future consequences of current stimulus need not be long-run theories in the calendar sense. For example, if the anticipated taxes required to pay off or service current deficits consist of rises in marginal income tax rates, output will be considerably lower and the real interest rates higher in a matter of a couple of years than without stimulus.   

The upshot of all of this is that the anti-stimulus economists are not claiming we must trade off benefits now for some long-term pie-in-the-sky benefits. Most are saying: The stimulus route leads to (almost) no benefits now as well as costs later. 

If we are all dead in the long run, then Keynes-Krugman must argue that we are all dead in the short run as well, too. 

All of this confusion could have been avoided if Krugman did not follow Keynes in his disrespect and disregard for those who dare to disagree.

23 Responses to ““In the Long Run We Are All Dead” What Does It Mean?”


  1. Implicit in what Mario said is the fact that long-run adjustments can begin immediately even as actors react with short-run adaptations. And actors bring the future into the present by acting in anticipation of long-run effects.

    In terms of the housing tax credit, it is clear that future sales were “borrowed” from and occurred sooner so as to capture the tax credit. The borrowing occurred against a background of lower demand for new housing. So the post-expiration demand has fallen off dramatically.

    Where was the stimulus in all that?

  2. Bogdan Enache Says:

    I think this Krugman op ed deserves even more attention : http://www.nytimes.com/2010/06/28/opinion/28krugman.html

  3. Troy Camplin Says:

    It would be better if he just stopped following Keynes. And if he didn’t give contrary recommendations based simply on what party is in office.


  4. This was perhaps the most senseless post I’ve ever read. You wrote: “If we are all dead in the long run, then Keynes-Krugman must argue that we are all dead in the short run as well, too.”

    What kind of twisted logic is that? The classicals argued that government should do nothing in the face of a financial crisis and depression because in the long-run, everything will return to normal. That’s true, but the long-run can sometimes be a long time. Had liberals not risen to power, gone off of gold and used government to lessen the severity of the recession, it could easily have lasted a generation. That’s what Keynes meant.

    “John Taylor finds that to the extent there was some effect of the fiscal stimulus it was very small” — but please, we’ve covered this ground, haven’t we? States and local governments raised taxes and cut their budgets. Once you take this into account, the stimulus itself was miniscule, certainly less that $10 billion a quarter. Taylor is going to find the effect of that on GDP? He’s got one observation! And he flat out did not know about what was going on at the state and local level. Completely ignorant.

  5. Lord Keynes Says:

    I thought Jerry O’Driscoll and Mario Rizzo
    admit that the neoclassical notion of equilibrium is not strictly true (I am not sure how their “pattern coordination” and “plan coordination” idea relate to neoclassical notion of equilibrium).

    In which case, Keynes was right.

  6. wiso Says:

    That was well put. Is economics like art which is to be understood by its fans or those interested? No! Its a tool for decision making and whether we take calender time or the technical thing. Truth is classical economics advocated for a hands off policy, in the hope that things would adjust and everything will be fine again. talking about intellectual experiments is a misuse of economics. The time it takes for economic variables to adjust is way too long, and given the gravity of some economic recession it can be even reasonable to take Keynes` statement literally. give us another global financial crisis and wait for the variables to adjust, we`ll sure die. Keynes was against what classicals advocated for, we cannot leave our economies at the mercy of the invisible hand

  7. Eric Feinberg Says:

    It’s almost as if the person writing this is trying to misunderstand Keynes. The point of the quote is simple: it doesn’t make sense to subject yourself to long periods of pain the interest of the future, because the future is no qualitatively different than the present — your needs are no less important in one time than the other. Also, the economic present has a profound influence on the future, so it isn’t as simple as “if you cut now you can spend later”; cutting now can negatively impact your ability to spend later. Krugman understands these things while laypeople often don’t. THAT is why many disagree with his policy proposals: for lack of understanding rather than genuine disagreement.

  8. Haresh Patel Says:

    What would Keynes have to say now that long term is knocking at the door.


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  10. Douglas Ort Says:

    All I know is that staples that I buy are 5 to 10 times what they used to cost 50 years ago, despite the improvements in productivity over the decades. My grandfather’s mixed farm required a dozen laborers days to stack the wheat into shocks, heave the sheaves onto a wagon, and haul it to the threshing machine. Now a single farmer with a combine can harvest a huge field larger than my grandfather’s entire farm in a day. If the Fed had maintained the integrity of the currency wheat would now be a fraction of what it used to cost. Instead, the Fed is happy with 2-3% annual inflation in the good times (to allow firms to raise employees raises which gives them the illusion of higher compensation), and in the difficult times all restraints are off. Anybody who didn’t trust the banks or stock markets 50 years ago and kept his money in a mattress has been screwed by all this inflation.

  11. Scott McConnell Says:

    Keynes’s point was that we have never been, nor are ever going to be, in equilibrium. Hence, his jibe (“in the long run we are all dead”). Neoclassical approaches to economics that assume equilibrium are based off of simplistic 19th century physics. Physics has since evolved and economics has not (at least some econ). The economy is continuously dynamic, driven by positive feedback, not negative feedback, which is required for any notion of equilibrium. Remember, Keynes was no bleeding heart, he recognized the weakness in the monetary production economy and tried his best to save it from itself, Austrians be damned. There never has been, nor can there be a purely laissez-faire system, it would devour itself.

  12. John Carter Says:

    Thought experiment indeed. Some people say all sorts of things. That’s not a coherent argument. Even Alan Greenspan has finally recanted his discipleship to the pop psychology of Ayn Rand and admitted that modeling economics on a presumption of rational bargaining theory is a bust. People often don’t act in their own long-term self interest. Economies often don’t find equillibrium and nations fall and are swept way by time like every other nation before us in the history of the world. When your stated methodology is to cling to formal definitions in modelling at the expense of the data, I’d say you have allowed your love of patterns to suck you in. Windowless monads and pre-established divine harmony for causation sort of patterns. This is what happens when politicking replaces the work of thinking clearly. (It would also help to distinguish between macro and micro economics so that you are not trading on confusions between them.)

  13. THarrison Says:

    In late 2008, after the housing bubble so spectacularly collapsed, a friend of mine was arguing that the government should not do anything because, if left to itself, everything would work itself out and the economy would recover in the long run. My response was “In the long run, I’ll be dead. So you’ll pardon me if I don’t want to wait that long.”

    I had not yet heard of Keynes’ quote, but I’m sure he said it for the same reason I did. Keynes was an interventionist, the classicals were not. The economy’s response could be critically damped, overdamped, or underdamped. In all three cases, the economy will eventually reach the same point, but it will take longer in the overdamped and underdamped cases, and the underdamped case could result in temporary responses that are more severe than necessary. If intervention can push the response closer to the critically damped case, i.e., return to equilibrium the fastest, then that would be desirable.

    Keynes’ comment was neither polemic nor an over simplification; it was just an observation.


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  15. Bob Klahn Says:

    The commentary is pure, unalloyed, garbage. In the long run we *ARE* all dead. I do not want my children and grandchildren to suffer years of deprivation to satisfy some theory of balance, or economic model.

    The author’s thinking only works if numbers on paper are the important thing, and human suffering is less important, or even irrelevant.

    That was Keynes’ message.

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  18. Peter Balacs Says:

    It is good to see Mario’s article. A pity that it has only now come to my notice. It is indeed well known, as Mario implies, that Keynes couldn’t resist the provocative remark. In fact, if the sentence “In the long run we are all dead” were removed it would leave the meaning of the remaining passage unaltered. Mario is right in saying that the long run is not concerned with calendar time. This goes for much of neo-classical as well as classical economics. I think it was Marshall (who was Keynes’s teacher) who first started to introduce realistic quasi-historical ideas of time into economics, to show how firms adjusted to changes in demand or other variables. Whatever the classical concept of the long run, Keynes was simply making the point that it could take a long time for an economy to regain equilibrium after a disturbance. (It was only later that he formed the view that the economy might never automatically re-attain full employment requilibrium.) There had, in fact, been a rather extended depression, within living memory, in the 1870s. Bear in mind, that the cited passage comes from The Tract on Monetary Reform (1921), and Keynes was here concerned with price stability, and hence with monetary policy and the role of central banks in restoring and maintaining price stability – rather than fiscal policy, which came with the General Theory. Thank you and best wishes, Peter Balacs

  19. Bob Klahn Says:

    I do believe your comment is impenetrable to normal people. Unless one already holds you point of view he will not understand your point of view.

    At that, you contradict yourself when you say he was making the point that it could take a long time for an economy to regain equilibrium. That is time, clock time, calendar time, not quite geological time.

    However, you are over complicating it by any rational standard. It is still years to decades of suffering until prosperity becomes general again, if not lifetimes.

  20. Peter Balacs Says:

    Mr Klahn levels three criticisms at my comments. The first is the impenetrability of my point of view. I can’t really answer this, since I wasn’t expressing a point of view, except to agree with Mario’s point that the classical long run was not concerned with calendar time. I believe that Keynes was well aware of this and that it was the whole point of his remark that we were all dead in the long run. Mario doesn’t quote the full remark which reads “But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.” Note that Keynes says “this” long run, meaning the classical (non-calendar) long run. Mario states that “Keynes was complaining about the “classical” economics, that is, the ideas of the economists before him who believed that the market, if unhampered after a recession, could reduce or eliminate the unemployment associated with the business cycle. Of course, this puts many economists – with different ideas – in the same category and treats the issue of cyclical unemployment in a grossly simplified way. But this, in general, is how Keynes treated those who disagreed with him. Keynes, the polemicist, was without inhibition.” When Keynes was writing, the economy was not in the downswing of a normal business cycle. A post-war bubble had burst. I don’t deny that Keynes could be a polemicist, but I don’t believe that he was oversimplifying. But what if he were. He knew how the Treasury mind worked. I have worked in Whitehall and it is known that higher civil servants prefer things to be simple. Whether or not classical economists thought that their theories were a guide to current affairs, Kenyes’s concern was that policy-makers thought so, and that policy was in fact based on those theories. As to the second criticism, I don’t see how I have contradicted myself by saying that Keynes was pointing out that it could take a long time to regain equilibrium after a disturbance without intervention. Since the classical model gave no clue, Keynes’s point was to do something rather than wait and see. The third criticism concerned my complicating matters, but Mr Klahn doesn’t say how. Keynes wanted to avoid the suffering that Mr Klahn mentions, which he thought would be risked by following classical theory. In fact the avoidance of this risk was at the heart of Keynes’s approach to economics and policy recommendations. Thank you. Peter Balacs

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