Special Topic - On Keynesian Economics

[slurpeeday]

I think you gave a refreshingly respectable presentation of Keynes. Until you got to capital theory. You simply ignore Keynes' view that investors are focused on short term investment rather than long term. Afterall, few investor will live long enough to get returns on investment in education or similar investments. If investors are focused on short run gains their activities aren't necessarily productive in the first place.

[slurpeeday]

@slurpeeday While government has the tendency to spend on long term investments, education, infrastructure, etc.

As for specific industries being affected by the raising and lowering of interest rates, I'm skeptical. From reports i've read investors continued to inflate the tech and housing bubbles because many thought they couldn't pop. Of course interest rates must have exacerbated the problems. Why don't you think these were examples of Keynes' 'animal spirits'?

[ProfEngelhardt]

@slurpeeday To me, Keynesian animal spirits are a nonexplanation - they're the equivalent of saying fluctuations happen "because they do". Now, I think it is plausible that a bubble mentality can make things worse, I don't think it can get things started - but excessively low interest rates can.

The point on me ignoring the private/public investment mentalities is fair (though I don't know that I'd call this "capital theory") - though I think Keynes is in error.

[slurpeeday]

@ProfEngelhardt In ch. 12 of the general theory, he gives a more lengthy discussion about how the stock market changed the nature of investing. In short, he saw stocks as giving investors liquidity that the actual business didn't have. Let's take your example of GM shutting down a plant. Let's say this scares share holders who think this indicative of greater problems. Their share holders can sell their shares and buy McDonalds shares. Allowing McDonalds to buy more deep friers.

[slurpeeday]

@slurpeeday Some capital especially in the stock market is very liquid.

I think his explanation of animal spirits has much more depth than you give it credit for. Day-to-day on the stock market, prices vary mostly on the demand so predicting the movements of the mass of investors can be more profitable than long term investments. Many players have enough capital to shift whole markets, remember Soros and the Pound. The market is plenty able to shift markets without low interest rates.

[ProfEngelhardt]

@slurpeeday The problem: we're talking about two different kinds of capital: financial and physical. Stock markets can shift financial capital around quickly, yes. But, McDonald's shares rising while GM's falls doesn't convert GM's physical machinery into physical deep fryers - and it is physical capital - not financial - that actually produces goods.

[alandufour]

What other solutions are there when the economy stagnates? Just let it work itself out? Look what happened with the banking crises. Humans need direction especially in a recession...

[ProfEngelhardt]

@alandufour "Let it work itself out" is the best solution that I can think of. For reasons described by Mises and Hayek, individuals are in a better position to solve economic problems than the government is. We see this historically, too. Despite popular myth, Hoover intervened in the early 30s, and FDR followed suit. Result: Great Depression. In 1920, there was a similar economic collapse - but Coolidge didn't intervene. Result: Recovery in 1921.

[kuzzlenuzzle]

@ProfEngelhardt: In theory individuals are in better position to solve economic problems, but as a professor of economics (I assume) you should be well-versed enough to know that individual incentives can add up to group failures and often do.

Everyone always points to the great depression. I say this: Yes, governments fail in their economic policy quite often (usually for political reasons); tell me though, how many countries have grown *without* big government intervention?

[ProfEngelhardt]

@kuzzlenuzzle Give me a precise definition of "big government intervention", and I'll give you an example. And I'm not claiming that individual incentives never add up to group failures (one topic I teach is game theory). At the same time, Hayek's information problem is fundamental to any attempt at centralized planning. Collective action problems, however, can be - and often are - overcome by appropriate (and voluntary) institutional arrangements.

[kuzzlenuzzle]

@ProfEngelhardt Sorry this took so long. Exams. Example: Every currently developed country got rich via some form of protectionism. Those who did not use obvious tariffs, subsidies, or war used more subtle methods such as refusal to acknowledge patents and copyrights from abroad.

Yeah, centralised planning doesn't work, but that's not what I'm talking about. I suppose what I'm really trying to say is that markets are not and can't be perfect.

[ProfEngelhardt]

@kuzzlenuzzle No problem. Based on the example, I think we have a problem. Every country - developed or not - has done the types of things you describe. (If there's an exception, I don't know it.) So, the empirics here don't prove much apart from the pervasiveness of intervention. What we do know, though, is that relatively free, open economies tend to be more prosperous than relatively protectionist ones. (Though there's a correlation/causation problem here.)

[ProfEngelhardt]

@ProfEngelhardt But, for your theory, the correlation goes the wrong way. If protection => development, then we wouldn't expect the least free economies to be the least developed - but they are.

Re: the perfection of markets - I make no claims that markets are "perfect". (Though I'd like a definition of perfect to be sure...) But, that standard isn't an appropriate one. The question is whether it's actually possible to improve on real market outcomes. Information problems make that hard.

[kuzzlenuzzle]

@ProfEngelhardt What we know is that relatively prosperous economies *are* more free, after having engaged in prolonged periods of protectionism. Free trade is the end, but not the means. Youtube is rubbish for conversations like this, so I'll point you at a couple of books I read: 1. Globalisation and its discontents by J.Stiglitz, and 2. 'Bad Samaritans' by Ha-Joon Chang. Both contradict everything I've been taught in economics class (the stuff you're saying), and they're both interesting. :)

[amrite]

@alandufour Exactly. look what happened. Obama and Bush's two giant bailouts only made it worse. No jobs created. More jobs loss. Economy remains unstable. FAIL.

[ajdaniels5]

Thank you! Your explanation really helps. Intuitively, the idea that the government could somehow "create jobs" by directly hiring unemployed workers never made any sense to me and I always felt skeptical about the government toying with the economy to grow or shrink it to taste, but I couldn't really put feet to why I felt that way.

Understanding the Keynesian roots that dominate much of fiscal policy is very helpful.

Again, many thanks!

[mintoo2cool]

what the fuck ? what languge is this guy speaking? i can barely understand him?

[ProfEngelhardt]

@mintoo2cool Seriously? Yes, the audio quality isn't great on this, but it's still most definitely English. What language did it sound like to you?

[mintoo2cool]

@ProfEngelhardt my apologies professor, but it sounded like german to me at the beginning . however , the problem lies in the audio quality , its as if the speaker is very forcefully trying to pronounce the last syllable of every word and he is in a hurry to pronounce it at the same time ...

[mintoo2cool]

@ProfEngelhardt my apologies professor , at first it sounded to me as if it were german . yes the sound quality is pretty bad , that is probably why its little difficult to comprehend. it sounds as if syllables in some words were forcefully muffled , and in some occasions skipped and said very fast in other instances. if possible add subtitles or re-record it.

[ProfEngelhardt]

@mintoo2cool I've added subtitles - I didn't realize that YouTube had made that reasonably easy. I hope that helps make it a bit easier to follow.

[mintoo2cool]

@ProfEngelhardt thanks , yes the subs are really helpful. and thanks for informing us on the economics .

[jgposner]

Well said. Could you redo this video with better audio quality? Your voice comes in and out. Thanks.

[elfornse]

Austrian Economics is the cure for the Keynesian Disease

[rictorn]

ok say you are right, your classic/austrian/freedmanites are correct, how do you redistribute wealth?

[elfornse]

You don't redistribute wealth via some coercive force.

That is immoral, inefficient and ultimately self-defeating.

By minimizing / eliminating coercive interference, free people who keep and control the fruits of their own labor naturally create wealth in abundance.

But there won't be equality of wealth.

And that is not the intention.

The intention is to constantly push up EVERYONES living standards which is what the free market can do moreso than any other economic system.

[rictorn]

no its imorral not to, 'not just because freedom without equalityis nofreedom at all' but because almost evreyone who is born rich dies rich, and almost everyone who is born poor dies poor

[rictorn]

inefficient but socialy cohesive and can make if it is and it dosent have to be it could be socialy efficient, in that it makes society better, so althoughthe rich may have less money they ahve a better standerd of living

[rictorn]

no equality in not attainable, what we want is the aim of equality, always working toward it

[rictorn]

it dosent push up everyones it pushes the rich 1/3 up the mid 1/3 saty the same and the por 1/3 have a relative poverty and high crime long hours nasty selfish society 4 everyone

[elfornse]

It does push up the poor.

Compare a poor person in North Korea vs South Korea

Compare a poor person in (former) East Germany vs West Germany

Free markets improve the welfare of the poorest people

Socialism (which is just an extreme form of Keynesianism) results in a stagnant dysfunctional economy where it is not uncommon for people to starve to death because the economy is so unproductive that it cannot produce and distribute enough food to feed its people

[rictorn]

i think education, employment, training and investment are worthy of investment, and taxing the better off to do so weather it is now or in the future, is correct both economicaly and socialy, if we tax 'fairly' we can slow down booms help poor people and the economy

[rictorn]

having seen what thature did to the economy and society in a ressesion, couldn't agree with letting a depression happen for some thooretical reason, when its not generaly economists who suffer, or in bevans words 'almost stave' in these situations its the poor

[ProfEngelhardt]

The reason is not theoretical at all. It's quite real. If we use resources for one thing, we cannot use them for another. So, it is important that we use them for the right thing, or we're only going to impoverish ourselves in the future.

[rictorn]

say kayenian economics caused inflation in the 70's, from the 30's to the end of the 60's it worked, the lot of the poor improved in relative as well as real terms, if you want to slow inflation without crippling the poor its the wealthy and relativley wealthy who's consumption you must curb creating a mass of poor ppl is the nastiest way to lower inflation i can imagine,

[ProfEngelhardt]

Actually, it's not clear to me that Keynesian economics did "work" from the 1930s to the 1960s. Unemployment was quite high until the beginning of WWII, at which point the drop in unemployment was largely the result of conscription. Post-war, there was a bunch of savings (because of rationing and price controls making it impossible to spend income during the war), so there was a strong economy in the post-war period. None of this is particularly "Keynesian".

[rictorn]

the freedmanites (of which i know you are not 1) i think realised kaynes was correct to think goverment could effect levels of unemployment and used this kaynesian insite to reduce inflation, if they did not do this on purpose, they should have reailsed thats what they were doing and tried a different lever, i don't know if it was healy or john smith who decried the tories 1 club policy, but it did so much harm, so an austrian economist is that anything like a classical one?

[ProfEngelhardt]

Austrian economics is a growth from the classical school. So, there's more in common between Classicals and Austrians than Keynesians and Austrians, but there are a lot of differences too. Major people in it: Ludwig von Mises, FA Hayek, Murray Rothbard, and Israel Kirzner. Feel free to message me if you want more detail.

[rictorn]

hi yes a bit simplistic i know, but your disagreement with kaynes is either leads us to do nothing or as thatcher did intervening to starve the monet supply, i basicaly think that you are a bit of a 'fellow traveler' with the moniterists the lord nelson approuch starving the money supply by turning a blind eye, where as

[rictorn]

if the tories had invested there oil money and the procides of the city pirates in manufacturing industry we may have a better society

i think you will agree that 'the sooner the better' is not a good thing in economics, shock tactics are just mad when trying to keep a economy going, may result in booms and busts, 1980-82 87-92 were hard on the poorest ppl in our society 2007- will be the same lets hope the affects can be amiliated and the most vuanarble can be helped as much as we can

[ProfEngelhardt]

Suppose that I'm living under the impression that I am a millionaire. Therefore, I go out and spend money like mad. In reality, however, I am not a millionaire. In fact, I'm just an ordinary guy. Are you suggesting that it would be better for me if I gradually learn that I'm not a millionaire? The situation in the economy is the same. If we have made bad investments, it is better to know sooner so that we dont' keep making them. This revelation of the truth keeps booms and busts small.

[rictorn]

yes i get that borrowing for ever can't work, but less borrowing higher taxes on the rich, more redistribution to the poor and investing in sound buisness and education by the goverment if neccary is good, mass unemployment is bad

[ProfEngelhardt]

Of course, redistribution creates potentially serious incentive problems. Also, there's the question of: if a business is sound, why doesn't a private firm start it? This is why I suggest that government fiscal stimulus is a waste of resources. If the product were valuable, then people would pay enough for it for production to be profitable - so profit-seeking entrepreneurs would do it.

[rictorn]

no redistribution dosen't create incentive problems, this is so easy for the right to argue because if you just change the benifits system give more money to the poor it makes it harder for them to justify paid work especily low paid work

[ProfEngelhardt]

I'm not sure how this is an argument against redistribution creating incentive problems. It's very clear that if the rich have a large percentage of their income taken away that they have an incentive to work less. It's also clear that if someone who is poor is just handed money that they also have an incentive to work less.

[rictorn]

i c sorry my fault i thought you were argueing against a benifits system giving ppl a reasonable amount of benifit, the rich wanting to keep even more of the wealth is obsean why would anyone would take the side of the priviliged against the underprivilaged,

[rictorn]

if we can redidtribute wealth and power we can make a fairer society have you seen the studies on social mobility in the uk comparing it post war children to those who have grown up since the thatcher/blair goverments since we have become more unequal social mobility has declined. i am sure we can all find studies which show us or dismiss those that don't agree with our point of view but such trends are shown in many studys

[rictorn]

the poverty trap works somthing like this if you only just have enough money to suvive you tend to have the blinkers on because you can only see as far as suviving another day, how can somone living on benifits or the minimum wage invest or start a buisness?

[elfornse]

The 'Poverty Trap' is a psychological phenomenon. Welfare breaks down the critical link between productivity and reward. This is the real trap because breaking the addiction to getting 'something for nothing' is like kicking a heroin habit.

[rictorn]

where as if you have middle class parents, middle class asperations, and you are supported through education, you are much more lightly to get a well paid job and do well in your life, where as if you are poor its very very hard to get out of this situation we know its not good for a society but how is the fair?

[rictorn]

but if you have a higher tax economy, resulting in less poverty, less descrepency between rich and poor better education health care and so on you remove the shacels that poverty and relative poverty place on people, and give them the tools to break out of poverty

[ProfEngelhardt]

What is not clear to me: how "relative poverty" places shackles on anyone. The fact that someone else in my country is richer doesn't make me "poorer".

[SUpersaiyajinjerkbag]

Keynes is very counter-intuitive. I just wanna know how this guy worked and instead I get a buncha pundits (not you, and yet...)

whining about how he was wrong. WW2 benefitted the US economy because it justified economic interventionism (not magic). Get over it

Third world countries such as the Japan and the asian tigersbecame rich (as did Europe) through interventionist tax economies. Get over it.

I just wanted to know how/why keynesian economics work, and instead I get a buncha pundits

[ProfEngelhardt]

Actually, the "WW2 benefited the US economy" statement is largely a myth. Robert Higgs raises good questions about the reliability of economic data at the time. Also, there's genuine debate over why Japan etc. became rich. Many economists believe it to be export-orientation - a market-based approach. Anyway, I hope the video proved somewhat informative. If you want a pro-Keynes economic argument, look up Krugman's work. I disagree with him, but you will at least get a pro-Keynes argument.

[rictorn]

look at the oecd studies into social mobility, the ability if put most simply to get rich if you are born poor, its the scandanavian countries, france, germany... that do well in this regard and the ultra capitalist usa uk and (i think) portagal come in bottom of the list, so if you want to live the american dream get born poor in france, if yoyu want to live the american nightmare get born poor in the usa

[ProfEngelhardt]

I haven't read that study yet (I just glanced at it). But, my first impression is that there's a simple explanation for this correlation. If the upper and lower quintile are closer together then there's less movement needed to get from one to the other. So, it's easier to shift quintiles in countries with more equal wealth distributions.

[rictorn]

i was arguing the economic case for helping sound buisness through a ressesion, to safeguard employment maybe for another 25 years or 50 years, at least untill a worse resession, i don't belive in the state owning the means of production, but the state should own monopolies as they are will otherwise use there position to exploite ppl, but i care much less about this than redistributing wealth

[ProfEngelhardt]

The question: how do we know if a business is sound? We certainly can't just ask the managers, as they have no incentive to tell the truth. The best measure is profitability. Sound businesses should be profitable. But, if they are profitable, then they don't need help. What do you mean by "safeguarding employment" for another 25 to 50 years? I'm not sure what you have in mind.

[rictorn]

yes 13 % inflation in 79 was too high, but long term unemployment, destroying communities, giving the uk a long term massive underlying unemployment putting good firms out of buisness and creating or masssivly expanding underclass is too high a price to pay, especilaly if you are poor or old or vaunarable

[ProfEngelhardt]

The problem - as Hayek was pointing out in the 1970s - was that the unemployment was going to happen anyway - and had already started to increase in the late 1970s. The inflation was leading to bad investments that weren't going to prove profitable - and they would eventually be shut down and people lose their jobs. This was going to happen whether the inflation was tolerated or not.

[rictorn]

yes the situation was bad the imf made us start fridmanite economics in 1978 healys was the 1st thaturate chancler, but starving the money supply led to far more than 'bad' buisness going under it led to many sound buisnesses going under buisness that could have suvived another 20 years,

[rictorn]

dads firm may have gone bancrupt then only stubernness living as if he was unemployed while wrking a 60hr week for a few years, but since then its been fine, not because it was leaner and fitter because no one has been stupid enough to try that kind of economic suicide (at least on that scale) since

[rictorn]

where are these resorces being diverted from? i think they are being diverted form hopfuly times when the economy dosent look poides on the obis to a time they are needed most, or form savings into investment,

[rictorn]

hello, i hope i can do this analiticly

mrs T. proved you wrong because she made millions of the poorest suffer, redistributed money, power, and oppertunity form the poorest 1/3 to the richest 1/3 of society, she like the good marxist i am sure she isn't knew to to this you must use economic levers you did not claim but you certainly seam to be on that side of the argument

[ProfEngelhardt]

I still don't follow where this proves me wrong about anything, as I don't see the connection between what Thatcher did and what I'm talking about.

My sense is that you're characterizing me as a monetarist (since that was what Thatcher tried to do - and that explains your reference to Milton Friedman). I'm not a monetarist. I identify as an "Austrian", which is why I talk so much about capital, and am really mostly concerned about money because it has an impact on capital structure.

[rictorn]

and also

we instead we have a low wage highly volatile labour market for most working class people and the better off getting richer and richer, a horrificaly high underlying unempolyment/long term disability clament rate leading to genorations of families who have no or very speradic employment, making it harder and harder for the poor easier and easier for the rich, thanks to milton, margrat et al

[ProfEngelhardt]

So, Thatcher could have let things go as they were - with the value of everyone's savings being eaten away at a rate of 20% a year. Or, she could do what she did - despite the fact that it was painful in the short run. The best thing would have been not to start the inflation in the first place - since then we wouldn't have had as much misallocated capital and labor that needed to be reallocated - resulting in low wages and unemployment. Illusions must end, and the sooner, the better.

[rictorn]

rubbish, thature proved you wrong by cutting the money supply putting up taxes in a resession putting millions out of work, destroying britains manufacturing base, lets assume the torys were right that we could not sustain these industrys a kainsian would have said lets invest in things we can be empoly ppl to do,

[ProfEngelhardt]

I'm not sure exactly what you are declaring rubbish, nor am I sure where Thatcher proved me "wrong". I never claimed that cutting the money supply or increasing taxes wouldn't have a negative economic impact. All I claimed was that playing with interest rates and fiscal stimulus will divert real resources from more productive uses to less productive uses. Also, let's not forget that price inflation was in the neighborhood of 10-20% when Thatcher took office.

[Anarkokommunist]

I suggest that you remake this video with better sound. It feels like somebody is hitting my ears when I listen to this. I hope that I do not sound rude, but that is how I feel.

[ProfEngelhardt]

Actually, I just relistened to it. The sound quality isn't great, but I don't think it's that bad... Maybe turn down your speakers a bit?

[5spoonfest5]

Why so little views?

[ProfEngelhardt]

Good question...

If you want there to be more, feel free to share it with your friends, favorite it, and so on!

[kumakouji]

Thanks for taking the time to make this video. I'm a Humanities student but my knowledge of economics is limited. It's something I've only just recently started to explore.

The reason I asked you to give me a general over-view of Keynesian economics from your perspective is because I'm trying to get as many different opinions as possible. Economics is absolutely riddled with political bias which means I'm gonna need to hear a broad spectrum of views to develop an informed opinion of my own.

[ProfEngelhardt]

Not a problem. I'm happy to provide my perspective!