Economics To End Economics

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.”    Continue reading

Robert Barro on the Impotence of Stimulus

by Mario Rizzo

In an interesting opinion piece for the Wall Street Journal, Robert Barro and Charles Redlick give empirical evidence supporting the claim that stimulus spending doesn’t work. By “doesn’t work” they mean that the government spending multiplier is less than 1. This means that stimulus spending increases national income by less than the amount of new spending. Why? Barro and Redlick are vague on the reasons. Continue reading

Richard Posner on the Precipice

by Mario Rizzo   

Richard Posner’s latest conversion is both charming and alarming. It is charming because it exhibits a youthful enthusiasm for a newly-discovered idea: Keynesianism. He just recently read John Maynard Keynes’s book The General Theory of Employment, Interest and Money. Posner’s tone echoes that of Paul Samuelson:

“To have been born as an economist before 1936 was a boon—yes. But not to have been born too long before!”

Then Samuelson quotes William Wordsworth:

“Bliss was it in that dawn to be alive,
But to be young was very heaven!” Continue reading

The Great Moderation In Macroeconomics

by Mario Rizzo  

I have now read both Paul Krugman’s New York Times essay on the state of macroeconomics and John Cochrane’s reply. They are each, in very different ways, quite disappointing. The level of argument is poor, the prejudices are simplistic, and the tones are annoying.   Continue reading

Auction Markets and Optimally Sticky Prices

by Joseph T. Salerno

Keynesian macroeconomists, old and new, have long criticized their classical and contemporary opponents for ignoring reality and treating the market economy as a giant auction in which prices are “perfectly flexible,” responding instantly to changes in supply and demand.  This charge is wrong on two counts.  First, all markets for outputs and inputs function precisely like auctions; and, second, auctions are not characterized by perfectly flexible prices but by an optimal degree of stickiness in prices that is determined by the market itself.

In this post I will deal with second point, because it has been generally neglected in responding to the Keynesians.  To illustrate this point I will use the example of a one day on-site auction of 49 unsold condominiums at a 73-unit complex that recently took place in Auburn, Alabama and which I also happened to attend. Continue reading

Prices and Information

by Jerry O’Driscoll  

In the recent discussion of Say’s Law, the issue of “sticky” prices came up. The term is the source of much confusion. The opposite of “sticky” prices is not “flexible” prices, but infinitely flexible prices. No matter how flexible a price, short of infinite flexibility, there will be quantity responses. Quantity responses are an inherent part of market economies, do not signal market imperfections, and do not typically trigger income-constrained processes.  

Price setting incurs information costs. How does a producer or  retailer know when to change his prices? Where does that information  come from?   Continue reading

Say’s Law Today

by Jerry O’Driscoll  

This post follows on my earlier one, “It’s All About Say’s Law.”  

Say’s Law of Markets answered the fears of under-consumption as the spreading industrial revolution brought forth an ever more bountiful supply of goods. The law’s logic is that production creates the income that is the source of the demand for goods.     

In the General Theory, J. M. Keynes recast Say’s Law as the proposition that “the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output.” That formulation would be foreign, if not incomprehensible, to any economist who had ever subscribed to Say’s Law.  That law negates the concept of “output as a whole”     Continue reading

It’s All About Say’s Law

by Jerry O’Driscoll

A friend with Keynesian leanings recently remarked that “it’s all about Say’s Law.”  He was referring to the contemporary debates over macroeconomic policy.  He was correct, but few economists on any side of the debates understand that is the issue, or why it is important. Continue reading

Should Economists Think About What They Do?

by Mario Rizzo  

Believe it or not, this is a controversial question!

Brad DeLong has argued that the profession seems to know less today about macroeconomics than, say, Keynes did. Paul Krugman has expressed similar sentiments. They see a kind of collective or professional unlearning in the past thirty or forty years. They are right.   Continue reading

Monetary Policy At War With Itself

by Mario Rizzo  

It is well-known that John Maynard Keynes favored permanently low interest rates in order to foster adequate and stable investment demand. Let us first focus on stability and then we’ll see a connection to adequacy.

 What happens when counter-cyclical policy (aka Lerner’s “functional finance”) is practiced?  

The Wall Street Journal ran an excellent small article by Richard Barley, focused mainly on the UK, that makes interesting general points. Investors must try to figure out when the current policies of quantitative easing will be reversed. Those who are long (or plan to be long) in the securities which central banks have bought are quite interested in timing.  Continue reading

Keynes versus Hayek: A rerun of the 1930s

by Mario Rizzo  

[This was submitted to the Financial Times as a possible op-ed piece. Unfortunately, it was rejected. Nevertheless, it seems to me that most readers of the financial press are still unaware of just how fundamental a challenge F.A. Hayek made to the economics of J.M.Keynes. Hayek’s challenge often gets homogenized with other free-market approaches that are still macro-economic in nature. Hayek questions the macroeconomic way of thinking.]  

Robert Skidelsky wrote in the Financial Times that recent debates among economists are a rerun of the disagreements between John Maynard Keynes and the U.K. Treasury in the early 1930s. To a certain extent this is true. But it might be more instructive to pay some attention to another debate in the 1930s. This is the debate between Keynes and Friedrich Hayek.    Continue reading

DE HAUT EN BAS: Niall Ferguson, Paul Krugman and John Maynard Keynes

by Mario Rizzo  

Recently Niall Ferguson wrote an interesting op-ed piece for the Financial Times about a debate of sorts he has been having with Paul Krugman on the spike in long-term interest rates and its relation to the large debt the U.S. Treasury must finance.  

In the course of that article Ferguson described Krugman’s attitude toward him (and his knowledge of economics) as de haut en bas. Although my poor French is good enough to know what this means, I still decided to check it out in The Oxford Dictionary of Foreign Words and Phrases. What I found was partly expected. Literally, it means “from above to below” or, in effect, “condescendingly.”  But the really interesting part is the example of use the dictionary gave:  

1995 Spectator Maynard Keynes…had a very de haut en bas view that he knew best what forms of culture should be supported (opera and ballet)…  

Shall we say that the apple never falls far from the tree?

Relative Prices Matter At All Times

by Mario Rizzo

Paul Krugman has written a column stating that wage cuts at this time are a bad idea. Following Keynes he claims that nominal cuts will do no good – they will not stimulate employment (or prevent unemployment) – because aggregate demand will fall. Real wages will thus remain unchanged.  

In part, Keynes directed this argument at a straw man.  The economist Arthur C. Pigou is supposed to have advocated wage cuts as the main cure for recessionary unemployment. This is not trueContinue reading

Keynes Against DeLong: A Comment on the Cowen-DeLong Debate

by Mario Rizzo


I am reading with some exasperation Brad DeLong’s comments in his exchange with Tyler Cowen on the efficacy of the stimulus package.


Clearly, DeLong is a rigid aggregate demand theorist. He talks about output and employment as if it were some homogeneous thing. In his mind, macroeconomics is just about spending to increase the production of stuff. Yes, there is lip service to the idea that the stuff should have economic value. But that is easy when you assume that the only alternative is value-less idleness. Continue reading

Lord Keynes: A Hayekian Appreciation

by Mario Rizzo


No, I haven’t gone crazy. John Maynard Keynes’s economics is not Austrian economics. He and Friedrich Hayek had serious disagreements over economic theory and policy.  I believe that Hayek was largely right in these disagreements. Nevertheless, Keynes was personally kind to Hayek. He found him a place to stay in Cambridge during the Nazi bombing of London. He also had some good things to say about Hayek’s controversial and, at the time, underappreciated book, The Road to Serfdom.


But, of course, this is not all. They shared a deep appreciation of the humanistic (for lack of a better word) aspect of economics. In effect, they looked at it as a “philosophical science” – a term that today might be considered a contradiction in terms. Continue reading

In Defense of Reasonable Ideology



by Mario Rizzo


There have been many statements recently to the effect that we should not let “ideology” or “philosophy” stand in the way of solving our economic problems.  Indeed, the Obama Administration (and the previous Bush Administration) are keen to persuade us to drop all of this prejudice and to go after each problem – banking, stimulus, and so forth – on its own terms. We should examine each solution on its own merits.


President Obama’s inaugural address includes an apparent attack on ideology:


“What the cynics fail to understand is that the ground has shifted beneath them – that the stale political arguments that have consumed us for so long no longer apply. The question we ask today is not whether our government is too big or too small, but whether it works …”



What appears to be a sensible idea to turn our problems into purely technical ones is, on the contrary, profoundly unscientific and, more generally, anti-intellectual.


This is a big subject and deserves comprehensive treatment. Let it suffice here to make a few crucial observations. Continue reading

Keynes on How to Create a Liquidity Trap

by Mario Rizzo


There is frequently confusion about whether John Maynard Keynes thought monetary policy is effective. This confusion is furthered by some renditions of John Hicks’s graphical IS-LM analysis (which, by the way, he repudiated in the 1980s). Most economics undergraduates have been subjected to this art.


The simple story about Keynes’s view is that he thought that the Bank of England should keep long-run interest rates low. This would be effective in maintaining high employment over long periods of time.  But short run, countercyclical monetary policy is another matter.


Economists are familiar with the Keynesian liquidity trap. This is the idea that the demand to hold money, rather than invest it, is so high at very low rates of interest that further lowering does no good. In other words, monetary policy cannot induce more investment even at lower rates. One reason proffered for this is that when entrepreneurial expectations are very pessimistic the interest rate is the least of a potential investor’s concerns. He does not expect a positive net return even at near-zero interest rates.


This was not Keynes’s principal argument, according to Allan Meltzer (with whom I concur). Keynes’s argument in “How to Avoid a Slump” is that “[v]ariability of interest rates creates uncertainty and inhibits investment” (Meltzer, Keynes’s Monetary Theory: A Different Interpretation, p. 195). Continue reading

Keynes: Stimulus Follows Stability and Not Vice Versa

by Mario Rizzo


I have been arguing for some time, both here and elsewhere, that the ideas of John Maynard Keynes after the mid-1930s and into the 1940s are more sophisticated that the prime-the-pump notions of many modern day economists who call themselves Keynesians. Keynes, himself, evolved away from those simple ideas he advocated in earlier years. Continue reading

Orthogonal mindsets

by Sandy Ikeda

At the Colloquium lunch on Monday, one of my esteemed colleagues wondered aloud whether Paul Krugman’s insistence that the humongous stimulus package needs to be much bigger wasn’t evidence of madness. Then, something came up during the actual colloquium – with Larry White, with whom we were discussing a chapter, dealing with Hayek versus Keynes in the 1930s, from his forthcoming book on the “clash of economic ideas” in the 20th century – that helped a non-macro-guy like me better understand, from a sociological perspective, why economists on different sides of the bailout/stimulus debate often just don’t seem to get each other. Continue reading

Keynes Supported Counter-Cyclical Payroll Tax Reductions

by Mario Rizzo


It seems that a number of conservative or libertarian economists are now supporting a temporary reduction in payroll taxes as a preferred stimulus idea. See, for example, here  


John Maynard Keynes beat them to it! In correspondence with the economist James Meade in 1942 Keynes says he is “converted” to Meade’s idea of altering the social security payroll tax over the business cycle. Continue reading

Keynes as Public Works Skeptic — Part II

by Mario Rizzo 

My post below, “Keynes as Public Works Skeptic” elicited much comment. Some of these comments accused me of quoting Keynes out of context and of generally getting it all wrong. To set things straight requires much more than blog posting.  I expect to be publishing an article with the American Enterprise Institute (AEI) shortly. I shall link to it.

In the meantime, I’d like to recommend to interested readers a working paper by Esteban Perez Caldentey, “Chicago, Keynes and Fiscal Policy,” Part 4 and following. I link to the entire paper here. I also recommend the books by Bradley Bateman, Keynes’s Uncertain Revolution (Michigan, 1996), especially Chapter 6 and Allan H. Meltzer, Keynes’s Monetary Theory: A Different Interpretation (Cambridge, 1988), especially pp. 182- 192. Continue reading

Illusion of Confidence and the Confidence of Illusion

by Mario Rizzo


One hears a lot about restoring confidence in the economy these days. What is that? The economy is a complex entity. In fact, Friedrich Hayek wanted to drop the use of the term and replace it with “catallaxy” that is, an abstract order of interpersonal exchanges. The word “economy” has its origins in the idea of household management and consequently of a household manager. It is remarkable how the etymology of the word is preserved in its current meaning (or, at least, connotation). Most macroeconomists seem to believe that the economy can be managed or steered out of its current difficulties. (Is it cheeky to ask how did it get into its current difficulties if management were possible?)


Now the latest is Olivier Blanchard arguing that what fundamentally ails us is “Knightian uncertainty.” If this can be made to go away then our economic difficulties would be many fewer and far less severe. To accomplish this, he proposes the usual array of stimulus. So all of that to get to the “consensus policy.” Continue reading

What Gets Stimulated When The Stimulus Kicks In?

by Mario Rizzo


Let’s assume for the sake of argument that, initially, increased government expenditure does stimulate a meaningful measure of national income. Is this sustainable? In other words, will the private sector be jump-started by this action such that when the temporary government expenditure is eliminated private consumption and investment will replace it? Continue reading