by Mario Rizzo
I used to think that Ludwig von Mises was exaggerating quite a bit when he suggested that Keynes was not really an economist. One way he did this was to associate Keynes with infamous monetary cranks like Silvio Gesell. The following quotation will give you a flavor of Mises’s opinion:
“John Maynard Keynes, late economic adviser to the British Government, is the new prophet of inflationism. The “Keynesian Revolution” consisted in the fact that he openly espoused the doctrines of Silvio Gesell. As the foremost of the British Gesellians, Lord Keynes adopted also the peculiar messianic jargon of inflationist literature and introduced it into official documents. Credit expansion, says the Paper of the British Experts of April 8, 1943, performs the “miracle . . . of turning a stone into bread.” The author of this document was, of course, Keynes. Great Britain has indeed traveled a long way to this statement from Hume’s and Mill’s views on miracles.”
Clearly, Mises under-estimated the power of Keynes’s intellect, his influence on the economics profession, and his ability to change the terms of public debate. Just as clearly Mises was a master of sarcastic mockery.
However, Mises’s mockery had a profound point. It can be simply stated. Keynesianism is not concerned with the allocation of resources and related niceties. One can see this is the policy prescriptions of the stimulators. Just get people back to work. If a market is depressed: Prop it up. Labor, other resource-owners and entrepreneurs need to stop worrying about searching for the appropriate use of resources. Bankers have to stop fretting about to whom they should lend. They should abandon their ultra-restraint. Those who are holding money should invest; they should buy bonds. No need to worry about inflation because the potential output of “stuff” (however it is allocated across industries) is above the actual less-than-full-employment output.
Where did my microeconomics go?
Now the typical Keynesian would probably say: This is the economics of depressions or recessions. Your precious micro will come back into its own when we get out of the slump.
But wait a minute. One of Keynes’s major points is that investment is volatile. Animal spirits are unpredictable. The news can turn investment demand topsy-turvy. So we are at all times at the brink of a Keynesian world. The needs of aggregate demand can at any moment overturn our “normal” concern with the niceties of resource allocation.
I hope to say more (in a more precise way) about this in future posts or elsewhere.
ThinkMarkets 
The fundamental question is whether an economy is a self-regulating system or not. Keynesians (and others) say “yes,but.” In “normal times,” yes. But not if there is deflation; or investors turn pessimistic; or there is idle capacity; etc. The exceptions gut the principle. Even if the macro pessimists are correct, where does the knowledge come from to make things better rather than worse? In the end, it becomes the rule of experts, a principle in which Keynes clearly believed.
Yes, he really did believe that he and his friends could be trusted to run things. That is what rationalizes his “agreement” with Hayek’s Road to Serfdom. If ordinary folk ran things then serfdom could follow. But in the hands of those aware of the dangers things would turn out just fine.
In Democracy in Deficit, Buchanan and Wagner (p. 78) write as follows: “Personally, [Keynes] was an elitist, and his idealized world embodied policy decisions being made by a small and enlightened group of wise people.” Roy Harrod called it “the Presuppositions of Harvey Road.” Next page, they observe that “Keynes was no democrat, in any modern descriptive meaning of this term.”
Prof Rizzo/O’Driscoll,
Speaking of blogs of aggregated data and using them as a guide for central banks… what do you make of the Scott Sumner prescription for monetary policy?
I’ve tried to get my head around this notion of targeting nominal expenditure, but I keep feeling like it’s still in the wheelhouse of keynesian macro-world. Even more difficult for my interested-amatuer mind is Sumner’s idea of the Fed issuing futures contract on GDP as a way to have the policy be guided by a more de-centralized, hayekian (I guess) mechanism.
Money and Macro are damn hard to follow once you leave the realm of actual relative prices, competition, allocation of scarce resources and all the other concerns that seem absent from Keynes and (I guess) Monetarism in the aggregate.
Any light on this from the Austrain perspective I value so much would be a real benefit.
John Papola,
I am aware of Scott Sumner’s work, but have not read it. So I don’t want to comment on it. The idea of targetting nominal GDP has been around for years. It is an alternative to targetting some price index (level or growth rate). Targetting macro variables inevitably involves forecasting models; the exercise quickly takes on the attributes of central palnning.
Jerry,
Sumner references Hayek as seeking to have the monetary system stabilize MV. I’ve heard and read this from Larry White and George Selgin as well.
What makes sense to me is to freeze the base money supply, but I’m thinking about this stuff entirely from reading other’s summaries, so I’m not confident in my understanding. The Austrian cycle makes a great deal of sense in terms of the relative price distortions of inflation and the inevitable malinvestments being revealed by rising input prices, just as we saw in the housing market where housing inputs like copper (and labor of course) went into the stratosphere.
All of that makes sense. An unchanging supply of base money, with broader supplies expanding and contracting based on market conditions and bank lending makes sense. But this other stuff with the monetary policy and targets doesn’t really make sense to me.
Am I missing something? Or is it more macro fantasy-land?
John Papola,
You are asking good questions. “Stabilizing MV” sound simple, but is anything but. M is reported weekly, but subject to revisions. V is not available in real time. Policymakers end up using forecasting models, which are problemmatic on a number of grounds.
Freezing base money would be easy, but would have created serious problems had it been in place in the 1990s. The Fall of the Berlin Wall and collapse of the Soviet Union brought a huge demand for US currency. More than half of US currency is now outside the country. What would the Fed have done?
[…] or contradicts many basic lessons about the allocation of scarce resources among competing ends. Mario Rizzo feels the same way: Keynesianism is not concerned with the allocation of resources and related […]
Stabilizing MV doesn’t require knowledge of M or V individually but only of MV itself–that is, a flow measure of spending. Measures of V are necessarily calculated using prior MV data.