Historians for Keynes


Over the transom this evening (which means, I got sent a link) comes this remarkable call for more consumer spending.  Economic historian James Livingston argues in the New York Times that you can’t rely on investment to grow an economy.  You need consumption instead.  Its climactic paragraph:

Consumer spending is not only the key to economic recovery in the short term; it’s also necessary for balanced growth in the long term. If our goal is to repair our damaged economy, we should bank on consumer culture — and that entails a redistribution of income away from profits toward wages, enabled by tax policy and enforced by government spending. 

As a historian I would expect Prof. Livingston to be aware of the writings of John Maynard Keynes.  As I read this article I recalled a famous radio speech Keynes gave on the BBC in 1931.  (The speech is in a collection of writings and speeches titled Essays in Persuasion.)  Let me illustrate that Prof. Livingston is channeling the great man himself, then why the situations are so different in 1931 and 2011.

There are to-day many well-wishers of their country who believe that the most useful thing which they and their neighbours can do to mend the situation is to save more than usual.  If they refrain from spending a larger proportion of their incomes than usual they believe they will have helped employment.  If they are members of Town or County Councils they believe that their right course at such time as this is to oppose expenditure on new amentities or new public works.

Now, in certain circumstances all this would be quite right, but in the present circumstances, unluckily, it is quit wrong.  It is utterly harmful and misguided…

Note that in economics a basic notion is that savings and investment are two sides of the same coin.  Savings can be private or public; both provide a supply of funds to be lent in financial markets to those wishing to build new capital.  Prof. Livingston would argue this matters not a bit, and to make his point he cites the decline in net non-residential business investment.  But economics also teaches that as economies advance this number naturally falls.  What makes it grow rapidly is the productivity of new capital.  It had been strong in the early part of the 1920s, but fell as radio had taken full hold of the U.S. communications industry.  And secondly deflation was a strong part of the 1930 economy.  This is not true today.

The U.S. economy has lower net investment because it has a larger capital stock.  That stock depreciates and needs to be replaced.  As we do so, we incorporate new technology.  In some sense we can never replace capital because the capital we buy is different vintage and better technology.  This means that productivity is enhanced by gross investment, not net.

Keynes was just getting started in that speech, though, and I’m sure his oration reached a peak when he started to plead for housewives to spend.  

Therefore, O patriotic housewives, sally out tomorrow early into the streets and go to the wonderful sales which are everywhere advertised. You will do yourselves good – for never were things so cheap, cheap beyond your dreams. Lay in a stock of household linen, of sheets and blankets to satisfy all your needs. “And have the added joy that you are increasing employment, adding to the wealth of the country because you are setting on foot useful activities, bringing a chance and a hope to Lancashire, Yorkshire and Belfast.

Again, things are not cheap, and household savings is currently at an ebb, not high tide as Keynes imagined in 1931.  The graph to the right is of household net worth between 2001-11.  Households have deleveraged and are trying to save for their futures. In 1931 the linens and towels that Keynes exhorted housewives to buy were falling in price.  Since they were semi-durable you could earn a positive return by laying up linens in the closet.  This is not true today.  Goods are not on discount — if anything, goods prices will continue to fall as world trade makes more and more goods accessible to more and more of the developing world’s middle class — and to us. They are only on discount if rampant inflation appears, which it might.  If it does, the savings in the graph becomes worth less and less, and will inspire more savings, to Prof. Livingston’s apparent chagrin.   

Keynes’ advice was for a world of depressed trade, deflation, and unleveraged homes.  Not so today.  Sometimes historians repeat history without worry of its application to our present troubles.

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  1. Profile Photo Member

    The most important insight here, by far, is that the denominator of installed base capital stock gets ever larger as the economy grows- therefore new business investment has to decline as a nominal share of the economy, even though it is still the most significant arbiter of economic growth. Thus, as King points out, Livingston is wrong due to basic math fractions.

    But I’m struggling with how to put that on a bumper sticker.

    • #1
  2. Profile Photo Inactive

    After reading the article I am reminded of something some pundit said about Ben Bernanke that seems equally applicable to Mr. Livingston, “He’s studied the American economy for 35 years…It’s a pity he didn’t learn anything.”

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  3. Profile Photo Inactive

    In yesterday’s WSJ there was a short REMEMBRANCES piece on John McCarthy a bright and inventive guy who died last Monday. Among his many accomplishments he left us with an incisive aphorism: “He who refuses to do arithmetic is doomed to talk nonsense.”

    Can any expression be more defining of Keynesian economics, or Obama’s efforts to regulate the economy?

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  4. Profile Photo Thatcher

    Terrific post!

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  5. Profile Photo Member

    So my post got between Peter and Epstein. Darn the luck.

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  6. Profile Photo Inactive

    Not long ago, one took upon the task of researching Keynes’ advice on economics to counter a Progressives argument that this was better than sliced bread.

    The entire structure of the basic economy has changed and the theory is simply unworkable by any means.

    Won the argument as it were, save the Progressive fellows solution was just to create bigger government as the solution.

    Just try dismanting a house of delusion brick by brick. Can be done.

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  7. Profile Photo Inactive

    Keynes had his paradox of thrift, which has been adequately savaged elsewhere. I haven’t fully read all his writings, and I know he died before full wartime recovery kicked in. But did he ever leave a prescription for when households should start saving again?

    The US savings rate has been quite low for some time now. Does anyone remember any politician in power, who urged people to stop spending and start saving again? Especially a “safe” two years after a recession ends, or in the boom times of the mid- to late 90s?

    (I know some Fed economists noted the low savings rate, but I don’t recall any actively encouraging a reduction in consumer spending, and an increase in savings.)

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  8. Profile Photo Member
    Dan Hanson: Terrific post! · Oct 26 at 8:20pm

    Agreed! I saw this exasperating NYT article earlier, and didn’t even know where I’d begin if someone brought it up in an argument. Thank you, Prof. Banaian, for the history lesson on Keynes!

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  9. Profile Photo Member

    Excuse me? Higher consumption drives up inequality; companies are forced to earn (and save) greater profits to offset the lower pool of personal savings. I assume Dr. Livingston wants the government to offset this, by suppressing profits through tax policy and redistributing whatever corporate savings remains back to consumers via massive budgetary deficits.

    Naturally that will lead to lower investment. At the same time, the artificially-boosted nominal wages will drive up inflation. This is the traditional Democratic model: wage gains drive up unit labor costs, which drives up inflation, while artificially-low interest rates encourage productivity gains. The high wages encourage businesses to invest in efficiency.

    Notice the key word there: inflation. Ever-higher nominal wages combined with an artificially-low cost of capital is not sustainable. Eventually, something has to give, which it did, in the 1970s.

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  10. Profile Photo Member

    “In 1931 the linens and towels that Keynes exhorted housewives to buy were falling in price. Since they were semi-durable you could earn a positive return by laying up linens in the closet.”

    Hunh? You should pay a dollar today for a sheet so you’ll be richer in six months when it is selling for $.75?

    I have to call my broker.

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  11. Profile Photo Inactive

    So the solution to our large national debt is to borrow more so we can spend more? What none of these economists ever note is that we have supported a standard of living beyond our means by borrowing money from people and countries that expect to be paid back. Our choices as individuals or countries is to 1) either grow our income so we no longer need to borrow money, 2) cut our expenses to match our income and the burden of re-paying the debt, or 3) repudiate some or all of the debt. Historically nations have chosen to repudiate their debts either directly or through inflation. That rarely works out well for the repudiating country.

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  12. Profile Photo Inactive

    Well, howdy all, you doin’ the arithmetic and such, I’m real glad that you got them math fractions right in your head, knowin’ exactly how this thing works without doin’ any thinkin’ about it even, that impresses a guy like me.

    And I’m real sorry that I caused any of you good citizens, especially Miss Diane the editor, some exasperation, mathematical and otherwise. Hell, I thought the Treatise on Money, particularly that old Volume 2, was a real interesting kind of book, it bein’ toward the end there about the US economy in the 1920s, and I did appreciate the General Theory, too, that idea about the non-identity of saving and investment was pretty cool.

    But shoot, folks, I just checked in here to tell you that I’m pretty grateful to Mr. King Banaian for clarifying some real important points about, well, you know, saving and investment and all. I’m humbled by the attention, and I hope y’all get a chance to read my response to Mr. King at my blog,


    and then again next week at historynewsnetwork.org.

    My most sincere thanks to y’all. Been a pleasure.

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  13. Profile Photo Inactive
    James Livingston: Well, howdy all, you doin’ the arithmetic and such, I’m real glad that you got them math fractions right in your head, knowin’ exactly how this thing works without doin’ any thinkin’ about it even, that impresses a guy like me. …] · Oct 29 at 11:39am

    Does that reply make the score Ricochet 1 : NYT 0 ?

    Though, that “howdy all” is in a league all of its own. Without competition.

    After all, a Gray Lady op-ed covered with insufferable condescension dripping from its title, “It’s Consumer Spending, Stupid,” containing a Krugmanesque carbon copy prescription for the White House’s latest flavor of elixir that dilutes the cure of market efficiency with a concentrated dose of debilitating irresponsibility for the middle class—afflicting it with chronic dependency on government welfare, concocted to be passed from generation to generation—is so predictable in its quackery that what more can it say than the time consumed reading it would be better spent clicking on “delete to trash.”

    Why Prometheus, oh why can’t you break the chain of punishment of reading daily, like taking cod liver oil, the New York Times?

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