 This is a sequel to my earlier show and I call it Keynes and Hayek head-to-head. It's an important little exercise because if you go back and read the literature of Hayek versus Keynes when they were writing articles about one another or one another's book, it wasn't much of a debate. Actually, it was Hayek reviewing Keynes' early book, Treat Us on Money, very negatively, and Keynes coming back with a negative review on Hayek's book. And that didn't quite make it as a debate, so it didn't go head-to-head as far as I could tell. So I think we're going to do that this time. And just to give you a clue so you know what to look for, ultimately we're going to set out the Keynesian framework in its simplest variety, which really is all we need to do, and then show what it takes to make it morph into the Hayekian. And by showing what it takes, then it should persuade you, I hope it persuade you, that the Austrian view is much more worthwhile than the Keynesian. So let's get started and see what we're going to do here. There's Keynes and Hayek. Hayek was junior to Keynes by about 16 years, and so he was a little bit hesitant. And of course Keynes had tremendous popularity at the time, and Hayek was a challenger from LSE. Keynes was in Cambridge, and they battled back and forth. And so like I said, I want to put him head-to-head, and it turns out it's not too difficult to do. Little-known photo that we dug up there. Hayek eventually dispaired over the debate. He just quit it as did Keynes, and Hayek and Keynes both thought it was probably more worthwhile for them to each work on their own theory than to take potshots at the other's theory, which is one reason we never got quite the head-to-head meeting. Now, just a brief bit of text here. What you're going to see is the circular flow framework. Keynesian theory suggests one, and you've all seen the circular flow in the textbooks, in which earning and spending are brought into balance by changes in the level of employment and therefore the level of income. And we'll see that what's called the circular flow pretty quickly morphs into Keynesian cross, when we have some vertical and horizontal axes that represents the halves of the circular flow. Hayek's vision of the economy suggests the means and framework, and that's, of course, pure mangarian in which means of production are transformed over time, and the over time is, of course, critical as the stages of production into consumable output. So one key difference between the Austrians and Keynes where the Austrians and most of any of the mainstream theories is that time, namely production time, is an endogenous variable in the system. It goes in at the beginning and stays in to the end. The dealing with time of some of the other models ends up, you make the model first and then you figure out what the lag structure is by empirical determination. So with the Austrians, time isn't an add-on at the end as a lag structure. It's simply the fact that it takes time to produce things in a capitalist economy and the more capitalistic it is, the more time it takes. So a brief review of Keynesian circular flow framework and here I apologize to any of you who've suffered through a principles course and seen the circular flow, but you'll get to see a little bit different version of it this time, so we'll see how it works. The circular flow. We have business organizations up above, and that's really just a shell. It's a facility that allows employers and employees to meet and allows things to happen. Down below we have all the people. We've got the workers, we've got the consumers, we've got the investors that will meet up there at the business organizations. And we'll start the circular flow here. There's part of it. And that's labor and other services. Being Keynesian about it morphs pretty quickly into just labor. Keynesian economics is labor-based economics, which goes to the exclusion of capital except when capital is getting in the way. And of course they get paid for it. They do that right. They get paid for it. And that's called income. And well, that's half the story. If you look at the other half, you get goods and services provided by the business organizations and you get expenditures by the consumers and some investors to pay for the goods and services. That's the circular flow. Now, I'm going to introduce a little Federal Reserve policy just to juice it up a little bit. This thing's on off. Let's put it on on. Yeah, the thing's circled. It's a circular flow. It is circling in opposite directions the money and the real factors in the economy. And it's going a little slow. Well, yeah, a little slow. But no wonder because if you look at that knob, it's turned over here to 6% interest. If we turn that down to 2% interest, pushing a lot of money into the economy, you can speed it up. There you go. So you speed it up a little bit. And if that causes inflation, well, slow it down. So that's the Keynesian stick. That was Keynes. Now, here's Hayek. And of course, his model is not a circular flow. It's a Mingarian stages of production. And the shape of that triangle changes as we saw during the last election. Goods move through the different stages of production. The thing can change in shape as interest rates fall and so on. So that's quite a difference between the Keynesian view of how the economy works and Hayek. So we've got a job to do to somehow morph from the circular flow to the triangle. We'll see how to do it. Keynesian equilibrium. Of course, income equals expenditures. It just means the flow on the right half equals the flow on the left half. Two flows have to be equal. Otherwise, something's piling up. Something's happening in the business organization. So income equal expenditures, y equals e. And this is for a wholly private economy. I'm going to leave off government expenditures here because I really don't need it for this particular administration. And I've learned when I taught Auburn classes that it helped to write out wholly in a wholly private economy because the Southern students thought I meant H-O-L-Y, the wholly economy. So c equals c plus i. That's the consumption plus investment. And notice here the c plus i. Well, that's just two things added together to give you total spending. There's no suggestion here of a trade-off between the two. Now, let's convert that circular flow into a set of axes there. You've got expenditures on the vertical axes, income on the horizontal axes. And equilibrium, by definition, is that 45 degree on because you want expenditures to equal income. You want what's flowing on the right to be what's flowing on the left to keep things from building up and tearing, being torn down at the business level. That's a 45 degree line. Bedrock for Keynesian theory is a stable, relatively stable and for analytical purpose, perfectly stable consumption equation that has a vertical intercept that means that you keep spending some even though you're earning nothing which shows you as a short run theory you can't do that for long. There's a slope of something less than one which that's the marginal propensity to consume. It means when you're earning extra ten bucks you spend some too, but not the whole ten bucks. Maybe you spend eight and save two. So that's a hardcore Keynesian theory. The equation C equals a plus by a is the vertical intercept over there on the left and Y or B, of course, is the slope of that consumption equation. And that equation is not going to change. It is what it is. We'll show one instance where it does change, but generally it doesn't change. Now you add on to that investment. Investment is just a given amount based on psychological factors. Keynes call them animal spirits. He used that term three times and a page and a half. So I guess he meant it. And so the two lines are parallel just because investment is what it is and it's just piled up on top of consumption that's the way it works. So consumption and investment as well as government spending, but we're leaving that out, are portrayed as additive components that are total spending. In terms of their stability characteristic, not in terms of any temporal issue where C is stable, I is unstable, and G is stabilizing. That's the Keynesian mindset. And here you can see plainly that income, which is measured horizontally, equals consumption plus investment. And so the economy is in equilibrium. We're going to let that be full employment equilibrium if only by happen so. Equilibrium doesn't mean full employment, it just means income equal to expenditures. But if you're lucky and you probably won't be, that could be full employment income. We'll see about that. So Holy Private Economy achieves income expenditure equilibrium when Y equals C plus I. Note that its income itself, in other words, instead of having prices and interest rates and wages adjusting to bring it into equilibrium, it's the level of income on that horizontal axis that changes to get you in, to get you equilibrium. So the economy can spiral up to an equilibrium or spiral down to an equilibrium. And there it sets in equilibrium even if that's not full employment. Keynes called it unemployment equilibrium. Equilibrium equals Y equals C plus I. Unemployment because, well, that's where income had to spiral to to get that equality. Yeah, according to Keynes, it's only by accident or design that the economy is actually performing at its full employment level. And I'm going to introduce a labor market here. We assume here that initially full employment conditions prevail if only by accident. And let's see how we show that. There's two ways to show it. One is by using our consumption versus investment and say there's a PPF. And then if we trace over from the level of consumption and that turns out to be on the PPF also at that level of investment, hey, you're at full employment. That's full employment. Keynes didn't use that PPF. He simply looked at labor markets. So let's make a labor market here. Full employment implies that the economy is operating in it on its production possibilities frontier. The PPF itself being defined in terms of sustainable output levels of consumption and investment. Good. So this is saying I'm using that PPF the same way I did this morning. What Keynes would do is pull down a labor market here and see what's going on. And if you look at the labor market, hey, look, you've got a supply of labor, demand for labor. And it turns out that we're in equilibrium. Good for us. Now Keynes describes that a little differently. If you're a marshalian, that is a micro-economist, what you see is there is a supply curve and there is a demand curve. And is it the case that prices have adjusted to bring them together? Well, it looks like that's the case here. Now Keynes would look at that a little differently. He would say, well, there's a supply curve and there is a wage rate. There is a wage rate. There's a supply curve and there's a wage rate. And he had a spatial name for that. If you're taking notes, you can write down the spatial name. If I were Judge Armantano, I would go up and tell me what the spatial name is. But the spatial name is it's the going wage. The going wage. And so the question is, if you look at the supply curve and the going wage, then you want to see, well, does demand intersect at just the point that makes that full employment? And if it doesn't, you're out of equilibrium and something needs to be done about demand. That's the way Keynes is thinking. So it's supplying the wage rate that are given and demand is up for grabs and can be manipulated by policy. Full employment implies that the labor market clears at the going wage rate, the going wage itself having emerged during a period in which the economy was experiencing no macro problems. So Keynes sort of brings that in the back door without anybody noticing. It's just going wage. Oh, that's the market of work for you and for me sometime back in the past when for some reason, if only by accident things were working right and you had full employment. But now if demand has changed and the wage rate hasn't changed, then we need to fix demand. Labor income is represented by W times N. W is the wage rate, of course. N means number of worker hours. That's the best I can do. I don't know why economists use N. They could use L for labor, but L usually means land in classical theory. So W, N. And of course that's just that little rectangular patch down there. That's income of labor. Keynes says, well, okay, that's income of labor, but it's a proxy for all income. As long as a ratio, the relationship between labor and land and capital don't change. And how could they? Why should they? If they don't change, then we can just measure income by labor income, multiply it by some factor if you know what that factor is, but don't otherwise bother me about it. All right. Now let's get going here. I'm going to bring back my circular flow. According to Keynes, a collapse in investment activity, the collapse of being attributed to the waning of animal spirits, is a primary cause of economic downturns. He doesn't announce that until one of the late chapters in the general theory. I think it's either the last chapter or the next to the last chapter. That's a primary cause. It's a waning of animal spirits. In response to reduced investment and hence reduced employment opportunities, the economy spirals downward into recession and possibly into deep depression. And here, of course, he's ignoring the interest rate effect. He had got any interest rate up here yet, any. So he's ignoring that effect and it's a derived demand effect all the way down. Now, I'm sorry, I don't have an axis for animal spirits. So... Okay. Well, that would tend to cool the heels of any investor. And so what happens is C plus I falls. Isn't that right? Let's let it fall. There it falls. But if C plus I falls, then you have excess inventories because you get C plus I plus something else or there's something else of stuff that got produced and it wasn't sold. So what you'll have is, like I say, things piling up on the business. You have excess inventories piling up at the firm level. See, up here it says E is less than Y. So people aren't buying what's being produced as measured by the income paid out to have it produced. And so we get these excess inventories. There they are there. Okay. Now, what happens then? The economy spirals down. Okay. So now watch the economy spiral down to a new equilibrium. Uh... Yeah, I see what I'm doing there. If you look upstairs, I want to go back... Oh, I'm going a long way from here. I'm going to go back to here. See, here's where we can show this Keynesian relationship. You see, income fell. That's that vertical distance of delta I. And that caused... Investment fell. That caused income to fall. And there's a ratio there. This is the so-called multiplier. Delta Y equals 1 over 1 minus b times delta I. That's the Keynesian multiplier. So if investment falls by 100, maybe income falls by 500. Uh... And but we also notice that consumption falls. Okay. So this is a business of everything falls. If investment falls relative to consumption, investment consumption both falls. They fall at different rates. But they both fall. All right? So the simple investment multiplier is 1 over 1 minus b. You might have seen that in your textbooks. That quantifies the relative rates of downward or upward spirals. Now look at the labor market. What's happened is the demand for labor has fallen. We're not investing as much in hiring people. But look, the wage rate hasn't changed. Why hasn't it changed? Because it's the going wage rate. The wage rate is the going wage rate. And so demand is wrong. That's the way Keynes we put it. So note that the going wage keeps going even after the market conditions that gave rise to it are gone. Now you never see that in the general theory or you don't see it in the textbooks. But when you state it that way, you say, well, something's funny about this theory. It doesn't deserve to be called a general theory. How general is it? You know? It's nuts. And so here, see, Keynes on wage rates is a funny thing. I had to read the general theory several times before I finally figured it out. But he has three arguments about the wage rate. And it's similar to what's known as a lawyer's argument. Do we have lawyers? Oh, they're all down to the politics on them so we can talk about lawyers. The lawyer can argue that my client didn't borrow your lawnmower. Okay? And it was already broken when you loaned it to me. Okay? It was in perfect shape when it returned. Okay? Now, if he can get the jury to fall for any one of those, these guys are flying it off. So Keynes did something similar. He argued that wages are sticky. They don't change. And he also argued there's a good thing they don't change because the wage rate is fine. What we need is more demand. If he could get you to go with either one of those, then he's got what he wants. Now, I could go on with this, Keynes, but in the name of time, I'm going to skip. I think I'm going to skip. Yeah. So, morphing now from circular flow to means-ins. You know, it gives me plenty of time to do that. And so I start again. I'm going to repeat this, but with an extension. This time, what's going on becomes more transparent if we keep that production possibility frontier in play. All right? So the PPF helps build a bridge from Keynes to Hayek. So there's the PPF, and it shows the same relationship I showed earlier. But now, let's do this thing about investment falling again. And on the left, the same thing is going to happen that happened before, so you don't need to watch that as closely as you watch the PPF. You can see, well, what happens here? And here we go. Let's see, you start off at full employment, and then let investment fall. Waning of animal spirits causes investment to fall. There it falls. Okay, now we're going to equilibrium. And what you see is the economy moves inside the PPF. You have unemployment, you're in depression. They both fell. All right? And again, you could look at that in terms of the labor market. All right? Now, suppose investment falls some more. Further waning. Down further. And it goes down again. Okay? Well, notice. Yeah, so demand is way down now. And you think the wages would be falling, wouldn't they? Wouldn't they fall? But no, doesn't even want them to fall. In fact, he wants policies to keep the wage rate from falling. And that's another part of the lawyer's argument. In other words, he's just saying, wage rates are sticky, they don't fall. And then he says we need policy to keep them from falling. Because they would fall if you let them. And the reason he doesn't want them to fall is because he thinks the problem is demand. We need more demand. All right? Now let's see what we're going to do. Yeah, if you look over here, I'm putting those points in from the PPF down to where it fell, and I'm even putting one outside the PPF, which would be inflation in Keynes' view. Okay, so movements inside the frontier and beyond are traced out by that linear relationship showing how consumption varies with investment. The straight line that passes through these points is called the Keynesian demand constraint. Now, I think it's worth knowing that the reason it's called the Keynesian demand constraint is because I named it the Keynesian demand constraint because you don't see it anywhere else. It's not in the textbooks. That's the Keynesian demand constraint. If you don't have enough demand, whatever the demand is, you're moving along that diagram with that upward sloping curve. And note here, this is just a matter of geometry. In case you're worried about, does all this stuff fit together? Note that if investment were to fall to zero, the economy would settle into an income equilibrium, income expenditure equilibrium with y equals c. And so, thus, that vertical intercept of the demand constraint corresponds to zero investment. And if you do the algebra correctly, you'll get the equation of that demand constraint. I may walk through it just very briefly. That's the equilibrium condition. How many of you have been in an intro macro course where you had to solve for the equilibrium level of income? You've done that and solved for the equilibrium level of income? My God, you better get it right. Well, take these same equations. In other words, take c equals a plus by and y equals c plus i and solve for the relationship between consumption and investment. So all we have to do is eliminate the y from the equation. And you know enough algebra to do that, and I'm not going to wage you through it, but it looks like that. And so you get c equals a over 1 minus b plus b over 1 minus b times i. And let me write it up here, too. There's the intercept is a over 1 minus b. The slope is b over 1 minus b. And c equals a over 1 minus b plus b over 1 minus b times i. That's the Keynesian demand constraint. That's the equation for it. It's a simple equation, but you show me where else it's written. When I published Time and Money, I thought I would be the first economist, actually, to put that in a macro book. Now, I got disappointed. And it wasn't because somebody else put it in their book first. It's because when Routledge sent me my complimentary copy of the book, I flipped page 136 to see my equation, and it wasn't there. There was just a blank space. And so the demand constraint is a big blank space. It wasn't there. So I'll blow it. Now, if you go to the Auburn Library and check out my book there, the equation is there, because I went over there and put it there. But I had to wait till the second printing to get it in the book. For simplicity, and you'll see what's going on here. For simplicity, let a equals 0. Well, no a doesn't equal 0, so let's let it equal 0 and let b equal 0.9. Then c equals a plus by becomes equal 0.91. A result which Keynes attributed great importance. And I picked those particular parameters, the 0 and 0.9, because Keynes used them to illustrate a point. And it's worth looking at his point. Let me read it and see if we can catch on here. If, for example, the public are in the habit of spending nine tenths of their income on consumption goods. And so that is b equals 0.9. It follows that if entrepreneurs were to produce consumption goods that it costs more than nine times the cost of the investment goods they were producing, some part of their output could not be sold at a price that would cover each cost of production. And he goes on to say, the formula is of course not quite as simple as this. Because a is positive. And so you get a slightly different equation. Not quite so simple. But there's always the formula more or less of this kind relating the output of consumption goods, which it pays to produce, to the output of investment goods. This conclusion appears to me quite beyond dispute. Yet the consequences which follow from it are at the same time unfamiliar and of the greatest possible importance. And of course, it is beyond dispute because it relies on wage rates not changing. It relies on derived demand being the only thing in play when savings increases and so on. But that's what King said. Now, let's keep track of the possible interest rates movement, the loanable funds market. And we can do that because we could put that loanable funds market downstairs there just like we had in the Austrian diagram. And we can draw the curves the same. Actually, Keynes recognized that you could draw the curves the same. But he said they still didn't imply what the Barcelonaians thought and we'll see how this works too. So now, you notice the PPF now is a dashed line meaning that you don't move along it. It's called the PPF. The second P is possibilities. The production possibilities frontier. At this point, it should be the PIF, production impossibilities frontier. You can't move along this center. You can only move along the demand constraint. That's Keynes. So Keynes argued that neither saving nor investment depended on any significant extent on the interest rate. He also argued that both curves, as conventionally drawn, shift together leaving the interest rate unchanged. So he said, yeah, draw your Marshalian curves. But don't shift one and see a movement along the other. They both shift. They both shift and they both shift at once and change the interest rate. And we'll see how that works. Now, with the loanable funds market in play, we see that decreased investment is accompanied by a leftward shift in the demand for the loanable funds. Let me back up just a minute because that's a complicated shift. What I'm going to do is decrease investment just like I did before. You have a wing in the animal spirits and investment funds. And that's going to show up in two ways. One is that that whole C plus I falls just like it did before. But two, the demand for investment funds down here shifts left. Because people aren't investing, so you have a smaller demand for investment funds. Okay, so now let's do that shift. There it goes. Now, if you're a market-oriented economist, you say, okay, the demand for investment shifts, and so there's downward movement on the interest rate, and Keynes would stop you right there because he'd say, oh, no, no, no, because before that can happen, something else happens, namely the economy crashes. In fact, it's a good bed. You can generalize this in Keynesian economics. If anything happens, the economy crashes. Because he's got his parameters set up to be equilibrium parameters only in a certain constellation. If you change any one thing, you're going to be out of equilibrium. If you're going to crash, it's going to give you inflation. You've got to go one way or the other. And so let's watch this. Let's see. With loanable funds in play, we see a decreased investment is accompanied by leftward shifts in the demand for loanable funds putting downward pressure on interest rates. But the spiraling downward of income implies that the supply of loanable funds that's saving also shifts. In other words, if you're not making as much income, you don't save as much. Revealing... relieving the downward pressure on interest rates. If you pull the trigger now, you'll see the supply of loanable funds shift. People aren't saving as much because investment is falling. People aren't earning as much. They can't spend as much. So you're stuck in equilibrium. Now, here's the kicker. I got this far in my development and then it reminded me of a particular graph that happens to be the only graph in the general theory. And I thought, well, that diagram in the general theory, which is kind of muddled up by Keynes, is about the same thing as the one I've got. And sure enough, let's look at it. There's the general theory. It's on page 180. And there's his graph that... I'm sorry, it doesn't look quite like mine, but we can show how it is mine. And let me show it. It's shown on page 180. Keynes presented the loanable funds market with the interest rate. He called it R. But R is on the horizontal axis. We usually don't put price on the horizontal axis, but he's got R on the horizontal axis. And what's he got on the vertical axis? Nothing. If a student did that, I'd flunk him. You can't label your axis. But if you read his script, you fail to label the axis, okay? But if you read the text, he says investment or saving is measured vertically. He should really say investment and saving, because investment measures the demand for loanable funds and saving measures the supply. So let's save Keynes and put saving, investment on the vertical axis, the interest rate on the horizontal axis. And now all we have to do is flip the thing over and rotate it. And we've got it. The same thing I've got. Keynes diagram can be flipped over, rotate 90 degrees to make it conform to the modern renditions. Okay. So now he's got it, except he's got the squirrely things kind of slope the wrong way in terms of saving. Instead of being bowed out, it's bowed over or something. All right. We'll make do with that. Now, some of the saving curves are intended only to demonstrate that income is a shift prime. In other words, you save it according to how much interest you get. But certainly if you're making more money, that curve is at a different place than it was before. If you're making less money, that curve is at a different place. So the supply of loanable funds with changes in income. So let's eliminate the ones where he's just showing it's a shift prime. And those are the ones. Now, look what we've got left. We've got an equilibrium interest right there. And both curves shifted. In fact, this is his point. This is his very point. When demand shifts to the left because a waning of animal spirits, supply shifts to the left too in such a way that the interest rate doesn't change. Well, that's exactly that's identically what I've shown in that bottom diagram on my PowerPoint. In fact, you can show that same thing over on his. You just have to stare at it and study it a little bit more to see I haven't changed anything in the process. I've simply flipped it around and eliminated the irrelevant parts of the curve. So we're right on track. In other words, that particular diagram shows that I'm being absolutely 100% true to Keynes in his general theory. That's one of the first charges that are made against the Austrian theory. Oh, you don't understand the general theory. You don't understand what he means. We do understand what he means. That's exactly it. And that's what we're incorporating. So that's what it's all about. Now, let me back up here. I'm doing OK time wise. Keynes also denied that the increase in saving would have an effect imagined by the loanable funds theorists. Keynes' paradox of thrifts and we've seen it before in a simpler form as articulated by the general theory is to the point. And here's what Keynes says. Every attempt to save more by reducing consumption, how else do you save, how else do you reduce incomes that the attempt necessarily defeats itself? So saving is self-defeating. Oh, don't say it. Just don't do it. Screw up the economy. Put us into depression. Now, let's see how that works. Now you really have to look at a lot because when I change, when I increase saving, that's going to lower the consumption equation. The equation that we said a while ago doesn't change. Well, Keynes says it doesn't change and it's a good thing it doesn't change. If it did change, then you'd have this paradox of thrift problem every time people decided to save more. But let's work with the instance where people do decide to save more and so that consumption equation is going to go downward. But when it goes downward, so is C plus I simply because I is sitting on top of C. So C and C plus I will go downward. And at the same time, savings will go rightward and people are saving more. So let's watch that. There they go. Now the one thing I didn't mention and I'm going to show this one more time is that that demand constraint is just as stable as that consumption equation. So if the consumption equation doesn't move then that demand constraint is just like it is. But if we're allowing the consumption to fall then that demand constraint will fall too. And so when I pull that trigger you see it fall too. Okay? Like so. And then you see where the I see we've got the right intercept. There's the economy crashing and now we see the economy is inside the frontier. Cain's was right if his model was right. So we've got a depression and we've got I haven't shown the labor market there. Hence the paradox of thrift. Try to save more and you'll instead learn less. And then there's the labor complement. In other words now the demand for investment funds has fallen and so we've got unemployment. So this was Cain's tirade against saving. Just don't do it. To resolve Cain's paradox of thrift requires only that we replace the Cain's and cross that reflects the economy's circular flow with the Hayekin triangle which depicts the means and ends in a temporal sequence. So this is the morphing. The morphing is about to begin now. So let's reset this thing. There it is. And I want to introduce that structure of production. So I recognize that that's consumption, isn't it? We're sitting here at full employment income. Just happens to be full employment income. And we see how much consumption is. But instead of measuring it like Cain's does let's bring in our structure of production and get rid of the Cain's and cross. Okay? Got that done. Cain's however assumed a fixed structure of industry. And this is in his chapter 2 which has a very innocuous title. It's called the choice of units. In this chapter 2 the choice of units. And in it he makes some simplifying assumptions. And he says we'd assume a fixed structure of industry. Which means essentially the triangle then changes a fixed structure of production. So okay, put the structure of production in if you want. But it's fixed. Re-chapter 2. Cain's is about how the economy works. If that structure can't change, it gets fixed. So we'll stick with Cain's for the time being. The only live issue then is the triangle size. It can get smaller, bigger but its structure doesn't change. Alright? Now we began as before with the economy functioning at full employment. The labor market is representative of each of the stages of production that make up the economy structure. If it's fixed then there's no difference in how labor operates among whatever stages there are. So when I look at the labor market that applies to everything along that time dimension. It is just the labor market. No differentiation. Okay? So the market mechanism is still in play here. The mechanisms of Cain's. So once again in accordance with the paradox an increase in saving causes the economy to spiral down into a less than full level of employment. Alright? So here we go. We've got an increase in saving. The income constraint failed. And now watch the reaction. Okay? So what we see is that you get a smaller triangle but not a differently shaped triangle because the shape is fixed. So you got unemployment all the way down the line. It's as if the derived demand effect worked unabated all the way down. Never mind that the early stages are interest rate sensitive. And of course you've got unemployment. There it is. The whole effect of the structure production comes from the initial reduction in consumption. The derived demand effect works undiminished on all the earlier stages. The interest rate is effectively out of play. The leftward shift of the saving took the downward pressure off of interest rates. And in any case the capital structure is assumed to be fixed. Again, does this deserve to be called a general theory? It's the theory of an economy and a stray jacket. So we need to take it out of the stray jacket. So here we are. Now I say three modifications are needed to transform the Keynesian vision into the Hayekian vision. And I want you to look at these three changes. And you tell me if there's any basis to object to making those changes. Right? Let's look at the first one. Divide the structure of production into stages. Is everybody for it? It's easy to do. There's early stage and so on. That's easy to do. What else? Avail the stage-specific labor markets in which wage rates are just to changes in market conditions. Here we just got one labor market. So let's re-outfit the labor market. And still I just do two stages. I don't have enough room to do five. So now we've got some variation here. And if you think about this now this structure of production can change now. The labor markets work differentially. And that's what moves you along the frontier. That's what moves you along the frontier. And so that demand constraint is no longer in play. And the only question is how do we get rid of that? Watch. Okay, it's gone. And the frontier now is a solid line. You can move it along. You can increase in saving. The paradox of thrift becomes a gateway to growth. Okay, a little hyperbole. Gateway to growth. But you get it. With wage rates and interest rates both adjusting to changing market conditions the economy can move along the PPF and the structure of production can adjust to an increase in save. Of course you've seen this before because it's just the Austrian model. The new equilibrium adjusts the shade saving, no unemployment, and the economy stays on track. In one of the early articles Hayek made this summary point in a little different context but it certainly applies here Mr. Keynes' aggregates conceive the most fundamental mechanisms of change. It's when we disaggregate stages and we disaggregate labor markets and we allow wages to change and we allow interest rate to change in in response to a change in saving. You allow that and the economy will work. Okay, so we've done our morphing. Okay, thank you Mr. Keynes. Actually I have time I'm surprised that we have time for a few questions. If anybody has. Yeah. I was wondering about doing it in Oahuana. I always wondered how it became the predominant view. How is it feasible that things will be changed? That's an interesting question. In case somebody didn't hear it how did Keynesianism become the predominant view? And part of it was because of the mesmerizing influence of John Maynard Keynes. I mean he was a hero going back to the Treaty of Versailles and a well-known figure and statesman and so on. And so people were inclined to get along with Keynes. And one of the things that's sort of ironic is occasionally you hear the Austrian economists refer to as a cult. Well if there was ever a cult it was Keynes and his little band. Because not only did he lamblast Hayek they had all of his people writing nasty reviews. Piero Strathe the worst one. Reviews of Hayek's work. But probably more important than that is that Keynes won out because of politics. It was the old don't just stand there do something situation. And that's the same today. That if the economy goes in the toilet for whatever reason then the government is expected to act quickly and act decisively. And Keynes had the recipe. You spend more money. You go in deeper in debt. You have public works. And Hayek was saying that if you ever get out of this depression I can show you how not to get in another one. Well that didn't quite do it politically. And if you have trouble understanding how Keynes prevailed Keynesian policy prevailed it would be the same trouble you have understanding how Obama policies prevailed. Now in the Great Depression we had Roosevelt making policy and one of his policies was killing pigs. Are you all aware of this? He was trying to keep up the price of pork because hog farmers weren't enough income. So he orchestrated the killing of pigs and I'm not talking about a dozen pigs I'm talking about millions of pigs he killed, I think, 8 million killed 8 million pigs and the hog farmers loved that because he paid them for the pigs and the pigs were just rotting on the ground. They weren't used for anything. Very bad policy but people loved Roosevelt because he was doing something really not Roosevelt because they got to sell their pigs to the government. Now in modern times we don't kill pigs. We crush cars. You remember the Cash for Clunkers program? That we got to get this economy going, let's destroy some assets let's destroy some cars. That ought to get it going. Really? Okay. And yet tremendous support in the program was judged to be very popular and it was popular with people who could sell their clunkers for above market prices. And some people were just in the spirit. They thought this was great crushing the cars. There was one newspaper report of an individual that came in with about a 12-year-old Mercedes. It was in very good shape. The guy always and he wanted a new car and this was his clunker. And they said, that's not a clunker boy we'll take that. We'll give you double the amount of money we could give you for Cash for Clunkers. And he said, no, I want mine crushed. He was with the program. So people don't know much about economics certainly not much about macroeconomics. They don't always go that way. Anybody else? Okay, you've been a good audience. Thank you.