Kahn’s Multiplier Argument: A Kaleckian Distributional or Keynesian Aggregate Income Approach?

I have been rereading Kahn’s classic 1931 paper The Relation of Home Investment to Unemployment for my coming work on a general theory of prices. The paper lays out the argument for the existence of a Keynesian multiplier for the first time. There are many interesting aspects to this paper and it is well worth a read as it is very dense, but here I want to focus on a singular point: the structure of the multiplier equation as laid out by Kahn.

First of all, let us take a look at the standard, modern-day Keynesian multiplier equation as laid out in textbooks. It goes like this. First we lay out a consumption function as we have in Equation 1.1 below:

Here, Co is autonomous consumption, and cYt-1 is the amount by which consumption rises due an initial rise in income. Finally Ct is the amount of consumption at the end of the period.

We then go on to lay out an equation for income, Y, which is the familiar GDP equation as shown in Equation 1.2 below:

We then substitute the import term and the consumption term to take account of how an initial rise in income will affect total income after the multiplier has taken effect. This is shown in Equation 1.3 below (note that the import multiplier works in the same way as the consumption multiplier laid out above):

What we see here is that an increase in income will lead to a multiplied increase in consumption but we also see a rise in imports due to the rise in income, this is represented by the import multiplier mYt-1 which is included together with the autonomous import variable M0. The rise in consumption has a positive effect on total end period income, Yt, while the rise in imports has a negative effect on total end period income.

Kahn’s presentation is altogether different. He breaks down the components of the multiplier into wage and profit incomes. This can be seen in Equation 1.4 below:

Where we have a multiplier relation for each variable, n for the profit generated by an additional man employed and b for wage of that man, which is the amount of expenditure spent on home produced goods. We then have the wage and profit variables, W and P respectively; again, per man employed. Kahn then lays out a more complete equation that can be seen in Equation 1.5 below:

Here we see that Kahn has included a term for the amount of imports that are bought as a result of a one man rise in employment, R, together with a variable for the increase in employment, k. It should be noted that Kahn is also more interested in the rise in imports coming from an increase in raw materials and unfinished goods than he is the rise in imports coming from consumption.

Kahn’s multiplier then tells us how many additional men will be employed, k, at each level of the multiplier. As can be seen there are separate multipliers for the wage consumption, b, and the profit consumption, n. This shows clearly the breakdown between the two and how each adds to employment via separate consumption multipliers for each term. Thus, in the case of a high wage multiplier and a low profit multiplier, for example, most of the income effects will be shown to be generated by the increase in wages; this could lead to the conclusion that a redistribution of income will lead to higher national income.

Although I still prefer the standard textbook method of laying out the multiplier and its effects on national income, I nevertheless find Kahn’s approach interesting for two broad reasons.

First of all, it lays out quite explicitly the distributional aspect of the multiplier process.

Secondly, it stresses not the effects that the multiplier has on national income, but rather the effects it has on employment.

It appears to me that Kahn’s multiplier, which is derived so far as I can tell from Keynes’ equations in his Treatise on Money, is more so along the lines of what we would today refer to as a Kaleckian distributional approach rather than a Keynesian aggregate income approach. Just another interesting note in the history of economic thought.

Update: I have laid out how to transform the Kahn multiplier into a truly macroeconomic multiplier for wages and profits in a new post here.

Alternate Reality Economics: Left Business Observer Spiked With the Ergodic Poison

I like the Left Business Observer. I think that its well written, quite amusing and sometimes provides interesting arguments and data-points that I would otherwise have missed. It is also generally up to scratch on economics, although some of the more Marxian commentary is not to my taste.

However, the most recent issue (#136) has, so far as I can see, laid out a really bizarre (one might say “neoclassical”) argument.

On page 4 Henwood (the author) tries to make a case against right-wing lunatics who claim that there has been no austerity in Europe. He’s right to make this case as there has been substantial austerity in Europe as can be attested to by the high unemployment and low growth rates. But the right-wing nutters point to the fact that the budget deficits have not come down all that substantially in many countries.

Henwood says that they are looking at it wrong. First he makes the point (which is correct) that in recessions the automatic stabilisers kick in and, as aggregate expenditure of unemployment insurance rises and tax revenues fall, the budget deficit opens up. But then Henwood mucks up the analysis. He writes:

The honest way to evaluate fiscal policy over time is by adjusting for the state of the business cycle: that is, what would the current structure of revenue and spending look like if the economy were at some approximation of “full employment”?

Big red flashing light there! Why on earth would Henwood think we should do such a thing? Well, he continues:

That allows you to isolate the active effects of policy, and separate them from passive changes in revenue and spending that simply reflects ups and downs in the economic cycle.

Henwood then goes on to provide a graph that shows IMF statistics for cyclically adjusted budget deficits as a percentage not of actual GDP but of potential GDP. Here is that graph (apologies for the quality, I took this on my phone):

Okay, let’s run through a few things here. Potential GDP is basically a projection of what GDP would be had a recession not taken place. It assumes that GDP growth would have followed trend. The cyclical budget deficit is a calculation of the budget deficit based on the supposition that consumer spending and tax revenues had not fallen. From what I can tell the latter is based on fairly dodgy calculations, but let’s not get into that here.

So, what is Henwood’s graph showing us? Well, it is showing us what the budget deficit would be if the economy had not fallen off a cliff and had continued on in some sort of unchanging but growing state. The problem with such a presentation? Well, the economy did indeed fall off a cliff. In that case, what is Henwood’s presentation telling us about the austerity in Europe: all of nothing.

You cannot simply abstract away from a massive recession and say: “this is what would have happened to the government budget without the recession”. Why? Because how on earth does Henwood or anyone else know this? Do they have access to a multi-dimensional gate where they know precisely what the future would have been in an alternate reality? I somehow doubt it.

What Henwood is doing is engaging in a classic error well-known to Post-Keynesians: he is assuming that economic data is ergodic and that the future mirrors the past. Well, it doesn’t.

I don’t want to get too deep into the methodology here as it becomes complex very quickly, but think about this for a moment: Henwood’s graph shows that between 2007 and 2008 the structural budget balance of the PIIGS as a percentage of  potential GDP almost doubled in size. But he claims that his measure irons out any endogenous change that occurred due to the recession. Does this mean that we should conclude that the PIIGS governments made a conscious decision to massively increase government expenditure in this period? Or is it more reasonable to assume that Henwood’s measure is not picking up what he thinks it is picking up? I’m going to opt for the latter.

In fact, this leads me to wonder if some of this huge increase is due to bank bailouts in the likes of Ireland. If this is the case then why are these not abstracted from out of Henwood’s measure? After all, these were not discretionary increases in government spending in the normal sense of the term and thus should not be included since Henwood wants to get to grips with the level of discretionary government spending relative to taxation; that is, in his language, “the active effects of policy” and not “passive changes in revenue and spending that simply reflect ups and downs in the economic cycle”. My reckoning is that you should count the bailouts in the latter.

No, the entire presentation is based on a variety of unstated assumptions that, when scrutinised, appear completely dubious. History happened the way it happened. To engage in such “what if” scenarios is discredited in historical studies as it is recognised for the fiction that it is, so why should it be permitted in economics?

If you want to see how much austerity has been undertaken by various governments you go and find the data on how much expenditure has been slashed and how much taxes have been increased (regardless of whether or not such tax increases generated the intended revenue as an austere government has no discretionary power over this). These flashy “alternate reality” measures of austerity will only lead to trouble and confusion. Let’s the better of us not start mimicking the neoclassicals, shall we?

Quantity Rationing as Business Strategy: Furthering the Case for a General Theory of Pricing

My last post on my attempts to create a general theory of prices met with some positive responses. I’m not hugely surprised. Any thinking person who has ever entered an undergraduate micro course has questioned the validity of what’s being taught. Although neat, it does seem to fly in the face of the economic realities encountered in the real-world.

One of the purposes of laying out a general theory of prices is to allow for a framework that can accommodate the massive variety of decisions undertaken by everyone from investors to firms to set prices in capitalist economies. The aim is to get rid of the notion that there is some sort of pre-determination to these decisions and that they can be modeled in some a priori manner.

Again, the idea is that in order to understand pricing in capitalist economies it is the responsibility of the economist to actually inquire into the reality of the price-setting process rather than just making up deductive arguments that are then projected onto the outside world. A general theory of pricing would provide a simplistic and highly flexible framework that can be used to discuss such empirical issues.

Here I would like to lay out a particularly unusual instance of price/quantity setting by a firm. The importance of the following example is not that it is general but rather that it is so particular. It is the unusualness of the following example that gives it the force of the exception that disproves any a priori rule.

Earlier this year the Abercrombie and Fitch CEO Mike Jeffries caused controversy when he said that he didn’t want overweight or unattractive people shopping for his brand. Jeffries also put his money where his mouth was in that the Abercrombie and Fitch shops were not stocking sizes that would accommodate overweight people.

Jeffries comments and Abercrombie and Fitch’s policies set off a firestorm of disgust at the elitist posturing of the company. Many even got a good laugh out of the fact that Jeffries… well, let’s just say he wouldn’t be featuring on any Abercrombie and Fitch billboards any time soon.

All these criticisms, however, missed the point. Jeffries is not an idiot. He knew exactly what he was doing. He knew that his comments would cause controversy but he also knew that they would play into Abercrombie and Fitch’s business strategy. As Forbes noted:

What Jeffries has done with years of obnoxious, exclusionary comments is sharpen the brand identity of A&F, and portray its customers as a select group – young, attractive, and popular. When he says he doesn’t want customers who don’t fit that image, he’s making his current customers more loyal and making the prospect of becoming a customer more attractive… Every time a critic trumpets, “Mike Jeffries is terrible for not wanting overweight or unattractive people in his stores,” they are propagating the exact branding message he’s trying to promote. Will A&F lose a few customers because of their obnoxious CEO and corporate ethos? Probably. But it will be no surprise if they end up adding new customers and increasing sales even as the controversy rages.

Exactly right. This was not some stupid gaffe on the part of Jeffries. No, this was a clever and calculated business strategy.

What is interesting about this example from the point-of-view of economic theory is that what Abercrombie and Fitch are doing is basically rationing. But they are not doing so to control price as in the typical economic theory of monopoly. Rather, by only stocking specific sizes in their shops Abercrombie and Fitch are bolstering the exclusivity of their product. This, perversely from the point-of-view of neoclassical theory, increases the quantity of goods sold and allows the company to increase its prices relative to its rivals due to the status of the product.

In terms of neoclassical price/quantity theory what Abercrombie and Fitch are doing is madness and makes no sense. But from a business point-of-view it is a genius move. Once again, the reason that the neoclassical theory fails when confronted with Abercrombie and Fitch’s strategy is because it assumes a fixed relation between supply and demand and between quantity and price. But these considerations have little sway in the real world and the Abercrombie and Fitch example merely highlights this is a particularly striking way.

A properly general theory of prices would accommodate such disparate and seemingly contradictory business strategies. It would not make any a priori judgements about how successful companies set their prices and ration their quantities. Instead it would provide a framework in which we can discuss such interesting particularities rather than one that needs to be twisted this way and that to accommodate them while immediately biasing the user as to the potential success of such strategies.

The Post-Keynesian View of Monetary Policy

Among Post-Keynesians there is a general consensus about interest rate policies: they are not, unless used in extreme form to generate recessions, very effective at regulating the volume of output or even inflation. Of all the Post-Keynesian arguments that I have come across this is the most mind-bending for neoclassicals.

The reason for this is that neoclassicals have a very unsubtle way of looking at the economy. They are mechanists who genuinely believe in prices that clear markets; and given that they believe that the price for, say, apples clears the apple market why would it not be the same for the capital markets?

I really want to stress this mechanistic aspect of neoclassical theory. Neoclassicals are generally students who were good at mathematics and not very good at creative thinking. These are the types of students for whom a differential equation made a great deal of sense, but who would be butchered in an argument about the subtleties of, say, a debate on theology or political strategy. They are generally people who like “correct” answers for things and have very little appreciation of nuance.

The discipline, in the way it has structured itself since the Second World War, encourages these students to carry through their studies and discourages more creative thinking students who prefer intuitive and empirical arguments with real-world consequences. This is deeply unfortunate as it has led to a whole generation of extremely mediocre economists and a discipline that is completely and utterly rotten and irrelevant.

Anyway back to the interest rate thing. The easiest way I have found to sum up the Post-Keynesian argument about monetary policy to neoclassical economists is to say that it is “non-linear”. In mathematics that basically means that a change in variable x that leads to effect y in one period instead leads to effect z in another. This often generates naval-gazing on the part of the neoclassical who then fusses and frets about the supposed “meaning” of such non-linearities — sometimes it leads to them contemplating the “meaning” of non-linearities more generally.

It is at such a point that you begin to really understand how these people think and why it is probably pointless to debate them on methodological issues or on issues regarding uncertainty. Such is like trying to debate English grammar with a Martian.

Nevertheless, it might be worth pointing to a fantastic summary I’ve come across recently of one Post-Keynesian perspective on the reasons that monetary policy in modern economies is a completely inadequate tool to regulate aggregate demand. It comes from Nobel prize winner — yes, so far as I know, the only Post-Keynesian Nobel prize-winner — William Vickrey in a fantastic essay entitled Fifteen Fatal Fallacies of Financial Fundamentalism; an essay which is worth reading in full. Vickrey writes:

In the heyday of the industrial revolution it would probably have been possible for monetary authorities to act to adjust interest rates to equate aggregate planned saving and aggregate planned investment at levels of GDP growing in such a fashion as to produce and maintain full employment. Generally, however, monetary authorities failed to recognize the need for such action and instead pursued such goals as the maintenance of the gold standard, or the value of their currency in terms of foreign exchange, or the value of financial assets in the capital markets. The result was usually that adjustments to shocks took place slowly and painfully via unemployment and the business cycle.

Current reality: The time is long gone, however, when even the lowest interest rates manageable by capital markets can stimulate enough profit-motivated net capital formation to absorb and recycle into income over any extended period the savings that individuals will wish to put aside out of a prosperity level of disposable personal income. Trends in technology, demand patterns, and demographics have created a gap between the amounts for which the private sector can find profitable investment in productive facilities and the increasingly large amounts individuals will attempt to accumulate for retirement and other purposes. This gap has become far too large for monetary or capital market adjustments to close.

On the one hand the prevalence of capital saving innovation, found in extreme form in the telecommunications and electronics industries, high rates of obsolescence and depreciation, causing a sharp decline in the value of old capital that must be made good out of new gross investment before any net increase in the aggregate market value of capital can be registered, together with shifts from heavy to light industry to services, have sharply limited the ability of the private sector to find profitable placement for new capital funds. Over the past fifty years the ratio of the market value of private capital to GDP has remained, in the U.S., fairly constant in the neighborhood of 25 months.

On the other hand, aspirations for asset holdings to finance longer retirements at higher living standards have increased sharply. At the same time the increased concentration of the distribution of income has increased the share of those with a high propensity to save for other purposes, such as the acquisition of chips with which to play high stakes financial games, the building of industrial empires, the acquisition of managerial or political clout, the establishment of a dynasty, or the endowment of a philanthropy. This has further contributed to a rising trend in the demand of individuals for assets, relative to GDP.

The result has been that the gap between the private supply and the private demand for assets has come to constitute an increasing proportion of GDP. This gap has also been augmented by the foreign trade current account deficit, which corresponds to a diminution of the stock of domestic assets available to domestic investors. For an economy to be balanced at a given level of GDP requires the provision of additional assets in the form either of government debt or net foreign investment to fill this growing gap. The gap is now tentatively and roughly estimated for the U.S. to be equal to about 13 months of GDP. There are indications that for the foreseeable future this ratio will tend to rise rather than fall. This is in addition to whatever role social security and medicare entitlements have played in providing a minimal level of old age security.

Although these are certainly not the only reasons that monetary policy is a largely ineffective tool in modern economies, they are certainly some very interesting ones. And considering them is much more interesting than having to play the neoclassical game and hand-wave about something abstract called “non-linearities”. Don’t expect the Martians to get it though!

Teleology and Market Equilibrium: Manifesto for a General Theory of Prices

Neoclassicals are a slippery bunch indeed. The moment you think that you’ve pointed out a flaw in their theoretical armor they turn around and say that the theory can accommodate the criticism. Soon after, you see them once again making the same mistake you were pointing to. This leaves you mystified: are they liars or are they just stupid?

I’ve come to think that a great deal of this is down to neoclassicals not actually understanding what their theories mean. Much of the theoretical framework is mathematical and geometric but in order to be relevant for the discussion of economics such mathematics or geometry must be interpreted in an economic way. This is where most neoclassicals fail. Hypnotised as they are with the tidiness of the mathematics they never really think through what it means.

A very good example of this is the typical supply and demand curve presentation.

At first glance this appears easy to interpret. The point at which the supply and demand curves intersect is the point at which price is set together with the quantity bought. Great. Right? Well no.

Actually there’s two ways of interpreting this graph. One way is what I call the “teleological” interpretation. The teleological interpretation is essentially that the curves are set in stone and that the market will always tend in this direction. The outcome then is pre-determined and thus the graph contains ex-ante predictive power: it can tell you what will happen in a market.

The other interpretation is the non-teleological interpretation. In this interpretation the supply and demand curves are not set in stone. We can play with them, manipulate them and give the all sorts of shapes. For example, we might look at the housing market in the run-up to the 2008 recession. Here is a case where demand increased as prices rose because people thought that these prices would rise forever. In such a case the above graph would have to be altered so that the demand curve was upward-sloping and basically overlapped with the supply curve.

This interpretation appears to prove that the neoclassical presentation can, for example, be used to understand speculative market dynamics. But really this is not the case; or at least not in any meaningful, substantive sense. Once the curves in the supply and demand graph are allowed to be arbitrary we can set them anywhere we want and they cannot tell us anything about the future. I.e. they no longer have an ex-ante predictive power and are instead a rather pointless formal way to present already known ex-post empirical observations (e.g. “we now know that the housing market was being driven by speculation so here is a nice little supply and demand graph to illustrate this after the fact”).

Here is my theory of neoclassical chicanery in light of this observation: neoclassicals actually hold to the teleological view of the curves almost all the time. Then when they are confronted with facts that do not fit the teleological view they fall back on the empty non-teleological view. This allows them to make predictions about how markets will react based on the teleological view and then when these predictions fail they simply say that they were never really adhering to this teleological view at all and instead they try and paint the supply and demand graphs as merely a way to present an empirical observation. (What the point of doing so is then left vague).

Such trickery is not, however, the work of knaves. Rather it is the work of fools who do not understand their own theories coherently because they cannot properly interpret them. The sophistry that emerges is not the cynical manipulation of the argument but rather a defensive posture adopted — largely unconsciously — to prevent the interlocutor from exposing the incompetence of the neoclassical in question.

The only way to solve this problem is to overthrow the presentation itself. The supply and demand graph presentation contains within it a hint of teleology that fools those who try to use it. Thus, the only way to ensure that people stop getting it wrong is to exorcise from the theory of prices any teleology. It is this that I am currently working on and which I should finish in the coming months.

The maneuver is the same as what Keynes did in 1936. Keynes argued that the neoclassical view of the macroeconomy was merely a special case — what Joan Robinson would later call a “golden age” — and he instead provided a framework for a more general theory. For Keynesians — real Keynesians, not the fakers you see all over the place — the neoclassical theory of output and employment is a highly unlikely special case, while there is no real “general case” but rather an unending series of particular cases. So, what we must do is apply a general framework to particular cases as they arise in order to interpret them in their singularity and individuality.

My goal is to lay out a general theory of prices in the same way Keynes laid out a general theory of employment and output. This will provide a framework in which the neoclassical case of downward-sloping demand curves and upward-sloping supply curves is a highly unlikely special case. With such a framework we can then approach particular cases as they arise in a properly empirical manner. In doing this I hope to be able to introduce the Keynesian theory to pricing; and with that, I think, the neoclassical doctrines will be utterly destroyed and a full, coherent alternative will be available. Fingers crossed!

The Mystery of Rising Excess Oil Capacity and Rising Prices

The following is an article that I wrote for FTAlphaville that was never run.

Quite a number of people think that financial market dynamics are substantially distorting the price of oil. FT Alphaville’s own Izabella Kaminska has laid out in a wonderful analogy as to why this might be. But she’s not the only one. As I’ve pointed out elsewhere there’s a whole motley crew of people who think this may be the case – including one Ben Bernanke before he was put in charge of the money-machine known as the Fed.

It might be interesting then to turn to the historical data to see what it might tell us. In this way we can put aside the mechanisms of how such distortions might be taking place and simply look at the fundamentals.

The best way to do this is to compare spare capacity to price. Presumably, if there is a substantial amount of spare capacity on hand and the market is being driven by fundamentals then the price should be either stable or falling. While if there is only a small amount of spare capacity available then the price should be rising.

A glance at that chart tells us that there appears to be no firm relationship between spare capacity and price and if we dig a little deeper we can confirm this. Between 1994 and 1998 the level of excess capacity was pretty stable and so was the price. Then something strange started happening. Between 1999 and 2002 the amount of excess capacity rose by nearly 40% in comparison to its 1994 to 1998 levels and yet at the same time prices rose by over 60%. This seems to indicate that something other than supply and demand fundamentals was at play in the price increases in these years.

Then between 2003 and 2008 excess capacity took a dive and prices soared. During this period the average level of excess capacity was about half that of the 1994 to 1998 period and about a third that of the 1999 to 2002 period. Meanwhile prices increased by over 100% in relation to their 1999 to 2002 levels. This makes a bit more sense, but the question as to what was going on in the 1999 to 2002 period still remains.

When we turn to the post-2008 world we also encounter something of a mystery. Between 2009 and 2012 the average amount of excess capacity was above that of the 1994 to 1998 period when prices were stable and yet prices continued to soar – rising over 55% by 2012 from their 2009 trough. Yet surely if there was ample excess capacity on hand these prices should have fallen rather than risen.

All in all, the only periods that make sense from a supply and demand perspective are the periods 1994 to 1998 and 2003 to 2008. The rest of the periods studied are characterised by stable or increasing excess capacity while prices nevertheless rise. From looking at this data we cannot answer why this is the case but as stated at the beginning of this piece there are plenty of people who think that they can explain this. We will leave it for now in their capable hands.

Marxism, Alienation, the Unhappy Consciousness and Gnostic Trickery

Here I just want to lay out, to supplement my last post, a quick note on what seems to me an epistemological error in Marxist philosophy — one that results from an inability to follow dialectical logic to its conclusion and arises out of the skepticism and Unhappy Consciousness that results. I will not, as is typical, quote the passages in Hegel that discuss skepticism and the Unhappy Consciousness in the typical way but instead I will insert sentences where I see fit. For those interested they can be found here. I see no point in quoting them because Hegel’s thought cannot readily be quoted as it exists in an ever-unfolding continuum.

Let us begin with skepticism. It is, as is well-known, the philosophical position that we cannot know anything because the external world is tricking us in some way. An early modern formulation is to be found in Rene Descartes’ Meditations:

I will suppose therefore that not God, who is supremely good and the source of truth, but rather some malicious demon of the utmost power and cunning has employed all his energies in order to deceive me. I shall think that the sky, the air, the earth, colours, shapes, sounds and all external things are merely the delusions of dreams which he has devised to ensnare my judgment.

As we can see, from the outset the skeptical position is tied up with belief in God. This is not surprising since what Descartes is really putting forward here is a Gnostic view of the world; a world in which the demiurge — that is, the creator — is not God at all, but instead some sort of malevolent devil and thus all we experience through our senses is Evil and fraught with trickery.

What we see here taking place is a fundamental splitting in the process of thought. No longer is the mind able to confront the external world directly; instead a distance must be taken and the whole thing must be considered false (think Neo in the film The Matrix). I use the term “splitting” with perfect awareness of its modern-day psychological meaning as this is indeed a similar process; all the Good and True is assumed to be “in here” — in the mind — and all the Bad and Untrue is assumed to be “out there” — in the world.

When Hegel discusses skepticism and the Unhappy Consciousness this is also what he sees. He sees a self-consciousness that has pulled itself in two — it has compartmentalised, in the modern psychological jargon. Hegel writes that:

It is itself the gazing of one self-consciousness into another, and itself is both, and the unity of both is also its own essence; but objectively and consciously it is not yet this essence itself — is not yet the unity of both.

Self-consciousness gazes upon what it thinks to be an external object — the world — filled with trickery and Evil. But in reality, this external object is always already part of the subject; it is but another aspect of self-consciousness, but a part that has been compartmentalised. The Unhappy Consciousness puts all the things it doesn’t like — such as the idea that it might fall into error — on the side of the external world and then closes back in upon itself. To overcome the Unhappy Consciousness, for Hegel, is to recognise that the external world is always already part of the subject; it is but a reflection of the unfolding of self-consciousness itself.

Marxism falls on the wrong side of the Unhappy Consciousness. It posits not that the external world is inherently Evil, but that it has been hijacked by Evil forces — the capitalist class — who spread their False Consciousness and Ideology among people, tricking and fooling them and not allowing them to see the Truth. But the Marxist — given his secret knowledge — is able to see through the ruse and understand that in order to restore the world to a Happy, Non-Alienated state he must simply defeat the Evil forces.

In truth this is simply a concoction. The world only appears in such a way if our self-consciousness reflects such a world. If we choose to view the world in this way we view the world in this way; meanwhile falling into the trap of Unhappy Consciousness as we fail to recognise that the whole narrative is really just that: a narrative.

Will the Marxist overcome what he or she perceives to be alienation if they succeed in taking over the State? Highly unlikely,as this “alienation” is merely the result of their own self-consciousness’ inability to overcome a rather difficult dialectical hurdle. More likely that, due to their Unhappy Consciousness, they will blame all their failings to realise Utopia on hidden enemies and conspirators; Evil forces continuing to spread trickery among people and keep them alienated and unaware. Such will, as it always does, lead to tyranny.

Addendum: Just to be clear before I start getting comments on this. My use of psycho-pathological terms above is not to suggest that Marxists are mentally ill. In fact, psychologists and psychiatrists are quite aware that we find many of these mechanisms brought into use by religions and cults. Just because a person is a member of such religions and cults does not mean that they exhibit mental illness; quite the contrary, they may be very well adjusted. Marxism, like Scientology or Praxeology, undoubtedly makes use of psychological blindspots in order to sell itself to its followers. But it does not follow that the followers are psychologically maladjusted in any way.

Marx, Hegel, the Labour Theory of Value and Human Desire

Hour-long, by hour, may we two stand
When we’re dead, between these lands
The sun set behind his eyes
And Joe said, “Is this desire?”

— PJ Harvey, ‘Is This Desire?‘

I’ll be honest: I hate discussing Marx, dialectical materialism and the Labour Theory of Value (hereafter: LTV). Why? Because it’s like discussing monetary theory with a hyperinflation obsessed Austrian; they don’t have enough grounding to have a discussion as they’ve only really read their side of the debate. Even those Marxists that have read Hegel come away with an understanding that is so deeply biased by Marx’s perversions of dialectical philosophy that they don’t get what poor uncle Hegel is saying at all.

Anyway, with all that in mind I’m going to here quickly lay out why the LTV requires Marx’s materialist dialectic to function philosophically. In order to understand this we must first understand how “value” functions in Hegel.

For Hegel value is an inter-subjective phenomenon that arises out of a desire for recognition by the Other. The great French Hegelian Alexandre Kojève was the one who put this most succinctly. In an excellent essay on Kojève entitled A Problem of Recognition Michael Roth summarises the answer to the question as such:

Kojeve begins with the question, “What is Hegelian man?” and answers it by explicating the structure of human desire, in contradistinction to the needs or demands of the animal. Human desire is the desire for recognition (reconnaissance), which, according to Kojeve’s Hegel, alone can lead to self-consciousness. Human desire, properly so-called, has as its object another desire and not another thing.” Thus, it is an animal desire which draws one to the body of another, but a human desire which is expressed as the wish to be desired, loved or-most generally for Kojeve-recognized by another. The essential mark of human desire is that it does not consume its object. The satisfaction of a human desire is thereby creative, since its object is empty. Desire, Kojeve says (following Hegel) is the presence of an absence. To make the same point somewhat differently: the satisfaction of human desire requires some form of mutuality (the loved one “returns” the love), or social recognition of an object’s value (a medal is given social value; the enemy fights to keep its flag). When satisfaction occurs, something new is introduced into the world (a useful object becomes beautiful; two individuals become a couple). For the satisfaction to endure, the desire qua object has to be preserved, albeit in an altered state. The simultaneous preservation and change (negation) marks the dialectic of human desire. The effort at satisfaction and conservation demands that this dialectic be linked with the development of self-consciousness. (Pp295-296, My Emphasis)

I highlight the above examples not because they are particularly important with regards to Roth’s excellent analysis but because they serve as a simple departure to discuss a properly dialectical analysis of value as against a crude Marxist so-called “dialectical materialist” analysis. As we can see, for Kojève and Hegel value is attributed to objects due to our desire for them. This desire, in turn, is inter-subjective. We desire to gain the medal or to capture the enemy flag because it will win recognition in the eyes of our peers. The medal and the flag are not valued for their objective properties, nor are they valued for the amount of labour embodied in them, rather they are desired for the symbolic positions they occupy in the inter-subjective network of desires.

By analysing desire dialectically — something Marx never managed to do — we see that a person’s desire is always already mediated through the desire of others — or Others, to use the more modern capitalised term. This is a similar take on human desire to that posited by Thorstein Veblen in his analysis of conspicuous and invidious consumption. It is also similar to James Duesenberry’s excellent contributions to Keynesian consumption theory.

Note that this is not marginalism. Marginalist theory is subjective but it is also atomistic. Actors in marginalist analysis have self-contained preferences; they do not have inter-subjective desires. Again to return to Roth, marginalist analysis is one that deals with animal desire; that is, desire prior to it being caught up in the inter-subjective abstract entity that we call “society”. Human desire is totally different. It is, in its very structure, interdependent; that is why, for example, people are more inclined to buy Nike runners when they see Michael Jordon wearing them. Marketers today are good Hegelians; not crude Marxists. It is to the latter that we now turn.

In the very first chapter of Das Kapital Marx lays out his analysis of the commodity. The form of the analysis is dialectical, but he never deals with the true object of dialectics: thought. Instead he deals with what he sees to be “material reality”. He shows that all commodities contain a variety of values — from use value to exchange value — but at the end of the day only one of them matters: labour value. That is, the amount of labour hours put into a commodity. This is ultimately, for Marx, what determines the value of a commodity. Marx writes:

How, then, is the magnitude of this value to be measured? Plainly, by the quantity of the value-creating substance, the labour, contained in the article. The quantity of labour, however, is measured by its duration, and labour time in its turn finds its standard in weeks, days, and hours.

This, for Marx, is how to properly understand value. And yet, as we can clearly see, it avoids the real dialectical analysis; namely, that of why humans actually attribute value to things. This is because Marx was a crude thinker who viewed people as objects and not subjects. He cared not for humans as fully realised conscious beings; he merely saw them as objects; masses of muscles and tissues that created commodities.

In this Marx was the same as the marginalists who, as I have pointed out elsewhere before, try to reduce people to a fixed bundle of preferences. Both analyses — which hold a cynical and rather dark vision of man — aim at reducing men to objects in the economic machine. Marx sees them as producers while the marginalists see them as consumers; but both see them objects determined largely by the economic machine surrounding them and not self-conscious subjects.

To deal with proper subjectivity is to deal with the complexity of human consciousness, human relationships and human desire. Marxists prefer to retreat behind a pseudo-scientific shield and instead interrogate Man as if he were an object. This is, in a very real way, the evil of Marxism. And it is what accounts for its cult-like qualities and its tendency to treat men as expendable objects whenever it gets the chance. The killing fields of Cambodia are not an anomaly; nor are the mass starvations in Ukraine; they both come directly out of a philosophy that treats men as it treats tractors and spades: as objects.

Gunnar Myrdal’s Monetary Equilibrium Theory: A Summarized Version

Jan has brought my attention to the following paper which lays out a good outline of Gunnar Myrdal’s Monetary Equilibrium. Since many are unfamiliar with Myrdal’s theories in the English speaking world I will lay out what I think to be some of the most salient points here.

Tobon lays out a nice clear series of conditions that must be met for monetary equilibrium to occur in Wicksell’s theory:

Or, in English:

Wicksell’s monetary equilibrium is defined by three fundamental conditions: 1) the equality between the money interest rate im and the natural interest rate in, 2) the equality between investment I and savings S , and 3) the stability of the general level of prices, that is to say its variation rate in time, P , is equal to zero. (Pp4)

Those familiar with theories such as the New Keynesian Taylor Rule or the Austrian Business Cycle Theory will instantly recognise that the conditions set out at the base of Wicksellian theory also apply to these theories.

In contrast to the three conditions needed for Wicksell’s equilibrium Myrdal lays out three different conditions — which, due to their probably being less familiar to the reader, will have to be explained in more detail. These conditions are as follows:

The first condition is that the price of new capital goods, c2, should be equal to the price of production of these goods, r2. Or, put somewhat differently: that entrepreneurs should not be able to make additional profits by taking advantage of the spread between the price of new capital goods and the price of production of these goods. This, then, is an equilibrium or ‘normal’ profit condition and leads to a constancy of the net investment flow.

The second condition is where all the action lies, as it were. It states that gross real investment, R2, must equal free capital disposal, W. We must understand free capital disposal to mean not simply savings but also expectations regarding the future. Myrdal breaks down W as W = S + D where the D includes expectations about the net change in capital values. Or, as Myrdal put it this value is:

…calculated for the period by taking into consideration all expectations of income and cost for the whole remaining life of the capital goods and also the interest rates which actually rule in the existing situation and are expected to rule in the future. (Pp6)

Here we see something very similar to Keynes’ long-run expectations in the face of uncertainty. What Myrdal is doing is replacing the I = S condition — which in his algebra would be R2 = S — with a term that also captures expectations concerning the future.

This is where the third condition comes in. Unlike in the Wicksellian framework — and also the Austrian framework — Myrdal does not assume that price changes in equilibrium should be zero. According to Myrdal Wicksell inserted this condition based on “sentiment and as a result of a normative, a priori, intuition”. Instead Myrdal allows that there will be some inflationary drift. Thus in his framework the change in prices in equilibrium, P, is a function of a constant, k.

We must then consider the effect that the third conditions — that is, the change in prices through time — has on the second condition. Or, put more simply: what effects variations in the rate of change of the price level have on the expectations of entrepreneurs.

Myrdal then introduces the idea that some prices in the economy are flexible while some are fixed. Thus, when the price level changes the relative price structure changes; fixed prices fall in real terms, while flexible prices rise in real terms relative to said fixed prices. This, according to Myrdal, eliminates the neutrality of money argument that was taken over by Wicksell from the quantity theory of money.

To summarise then, what Myrdal was doing was explicitly introducing expectations into his theory of investment. This is what then allowed him to introduce the notions of ex post and ex ante that I discussed in my previous post. Myrdal then makes these expectations rely on what entrepreneurs expect future price changes to be. But by introducing the idea that some prices may be fixed, different entrepreneurs will experience different changes in real prices and this will affect their future decisions to invest etc.

Myrdal’s theory, then, in some ways resembles certain New Keynesian theories; although it does have the advantage that it has a term, D, that might be interpreted as ‘animal spirits’. Unfortunately, Myrdal never considered the dynamics of the credit-system he introduced. While he did indeed recognise that money is endogenous and not neutral, he never really examined what effects shifts in demand could have on the credit-system and vice versa. He thus never came to appreciate the existence, for example, of debt deflation dynamics as Keynes had in his General Theory.

He also appears, at least at the time of writing Monetary Equilibrium, to have believed in the naive marginalist view of the world where prices are set in line with some sort of utility-calculus and, apart from a few “sticky” prices, the economy adjusts cleanly to changes. But I suppose a similar case could be made for Keynes who certainly did take the neoclassical theory seriously before criticising it on its own terms. Better, I think, to throw out the lot.

Gunnar Myrdal’s Prescient Criticisms of Keynes’ General Theory

In my post on the Austrian Business Cycle Theory Jan, a regular commenter on Lord Keynes’ blog, once again brought up the Stockholm School of economics. He has been doing this on Lord Keynes’ blog for as long as I can remember and there has so far never been a proper discussion.

What was the Stockholm School? They were a group of economists working in Sweden in the first half of the 20th century who, like Keynes, were followers of the Swedish economist Knut Wicksell who had expanded the latter’s theories to take into account shortfalls in aggregate demand. The two main figures were Bertil Ohlin and Gunnar Myrdal.

I am only really familiar with the work of the latter — and even then, only in a highly abridged edition entitled The Essential Gunnar Myrdal from which I derive all the quotes in the following post. It seems to me that the purely economic work of Myrdal and Ohlin is very hard to come by in English.

In what follows we will focus on what Myrdal considered to be his main contribution to Keynesian theory; that is, the distinction between ex post and ex ante in the analysis of savings and investment.

This distinction, which came from a book called Monetary Equilibrium which the Post-Keynesian economist G.L.S. Shackle called “the most undervalued work of economic theory ever written”, strikes me as being extremely useful in discussing the equilibrium/disequilibrium of savings and investment. Many Post-Keynesians would later come to realise this.

In Monetary Equilibrium Myrdal writes that:

A criticism of Keynes and Hayek would have to begin by pointing out the fact that in their theoretical systems there is no place for the uncertainty factor and anticipations. (Pp32)

This may strike Post-Keynesians as being a rather unusual statement. After all, doesn’t the General Theory contain an extensive discussion of “animal spirits” and action undertaken in the face of uncertainty? Yes, it does but what Myrdal is complaining about is that the actual theoretical framework of the General Theory, which is static, cannot really accommodate these observations. He writes:

It is good proof of Keynes’ intuitive genius that he reaches practical results that in many respects are very much superior to his deficient statements of certain theoretical problems. (ibid)

Myrdal goes on to say that if we introduce the distinction between ex post and ex ante we can avoid much theoretical confusion. Before we turn to this statement let us allow Myrdal to define what he means by these terms:

Quantities defined in terms of measurements made at the end of the period in question are referred to as ex post; quantities defined in terms of action planned at the beginning of the period in question are referred to as ex ante. (Pp34)

He then goes on to make the salient point that it is only by keeping this in mind that the Keynesian framework can fruitfully be applied to the analysis of savings and investment in real historical time:

Looking backward on a period which is finished, we are looking at actually realized returns, costs, etc., as those items are registered in the bookkeeping of business. In such an ex post calculation there is, as we will show later, an exact balance between the invested waiting and the value of gross investment [Phil: he appears to mean savings and investment]. Looking forward there is no such balance except under certain conditions which remain to be ascertained. In the ex ante calculus it is a question not of realized results but of anticipations, calculations, and plans driving the dynamic process forward. Had this distinction been kept in mind, much confusion about “saving and investment” would have been avoided. There is in fact no contradiction at all between the statement of an exact bookkeeping balance ex post and the obvious inference that in a situation in which saving is increasing without a corresponding increase in investment, or perhaps with an adverse movement in investment, there must be a tendency ex ante to disparity. (ibid)

Let us not doubt the importance of this distinction. Myrdal is perfectly correct that it is not to be found properly articulated in the General Theory which was indeed embedded in a static framework rather than one suited to the analysis of economic processes embedded in actual historical time. Indeed, it was the role of uncertainty and expectations that Keynes had to stress in the follow-up 1937 article to the book that attempted to clarify the central argument, The General Theory of Employment.

It is also now widely realised by Post-Keynesians that a failure to properly recognise this problem led to the misrepresentation of Keynes’ central argument in the ISLM diagram; indeed, it was for this reason that John Hicks, the inventor of the ISLM, abandoned the framework in his mea culpa 1980 article ISLM: An Explanation.

With all that in mind I will leave the reader with a quote from Joan Robinson and John Eatwell’s excellent classroom book An Introduction to Modern Economics in which they clearly realise the problem that the idea of a static equilibrium between savings and investment has caused in the minds of economists since Keynes put it forward in his General Theory. What’s more, they also realise this problem in properly Myrdalian terms:

In the early days of the exposition of Keynes’ General Theory it was usual to argue as follows:

Y = C + I

Y = C + S

Therefore, I = S

But, since net investment and net saving are accounting identities, this was not a legitimate argument; it allowed hostile critics to create confusion. An ex-post accounting identity, which records what happened over, say, the past year, cannot explain causality; rather, it shows what has to be explained. Keynes’ theory did not demonstrate that the rate of saving is equal to the rate of investment, but explained through what mechanism this is brought about. (Pp216-217, my emphasis)

Alas, however, it was too late. Such classroom texts soon fell out of print and into oblivion and the ISLM came to reign supreme. It might be interesting to note that Paul Samuelson thought Myrdal’s work to be “anti-climactic”; a sure sign that Post-Keynesians should pay close attention!