Help! My Econ Professor Is a Keynesian

[ababba]

The difference between your professor and the people trying to critique your professor in this thread is that the people in this thread see economics as inseparable from policy. Your professor most likely sees economics as a descriptive science. How you think about which economic models are correct certainly affects views about policy, but the notion that Keynesian economics means government intervention is a fantasy. Keynesian economics is sticky prices and a liquidity trap. Its not government intervention.

 

[mczerone]

This is one of the most incorrect things I've heard about economics in years. You hear these fallacies all the time, that anything good for public policy is good for an individual. Its a bad principle in general. Lets take taxes as an example. I might be perfectly willing to pay 25% of my income to the government in exchange for some goods and services if everyone else agrees to do the same thing, but not be willing to do it if nobody else contributes. This is just common sense. I might be willing to contribute 1/100 of the cost for a park but not pay for the entire park myself. There is nothing inconsistent about wanting the government to do something and not be willing to do it by yourself.

Now lets talk about the case of interest rates. The Fed doesn't just set interest rates. They change the money supply and interest rates adjust endogenously. What that means is that these are equilibrium real interest rates. People in the free market are willing to borrow and lend at these real interest rates. In a low interest rate environment, everyone that loans out money still chooses to loan that money out and the interest rate clears the market.

I understand the marginal effects of individual action vs. group action. But what is the govt? You seem to describe it as some "all powerful policy setter" that can determine the new "equilibrium".

But it's just another actor WITHIN the market. The only difference between the Federal Reserve and some investor's club is that WE DON'T GET TO OPT OUT of the Federal Reserve system. Whatever they say has the coerced backing of every person using FRNs.

The professor shouldn't lend his money out at lower interest rates than he would like. He doesn't have to. There are people in the marketplace that voluntarily choose to do it. Obviously the benefit to the economy is distributed to the other 300 million people and he only gets a tiny fraction of it while bearing the entire cost of choosing to loan his money out at lower than he would like. Now if everyone else did it, he may think its a good idea. He may not think its a good idea. What people miss is that these models like IS-LM don't directly make policy recommendations, they just tell you what is likely to happen in response to a given policy.

And if he does or doesn't, lets let him. The Federal Reserve doesn't give a flying heap what this economics professor or that would do, individually or with cohorts.

Lastly, IS-LM and other econometric truisms don't at all analyze the responses to policy. They don't look to changes in incentives, behaviors, or value judgements of well being of the individuals in a society. They, from the start, abstract away from individuals acting as independent thinkers in a market and towards treating money and commodities as perfect fluids and atomistic particle flows.

I applaud you paying attention and memorizing your Econ 302, but the attack on my question was unwarranted. I understand what you are saying, and my question was meant to illicit from this professor a line of thought - not be an actual recommendation for action.

 

[ababba]

I understand the marginal effects of individual action vs. group action. But what is the govt? You seem to describe it as some "all powerful policy setter" that can determine the new "equilibrium".

But it's just another actor WITHIN the market. The only difference between the Federal Reserve and some investor's club is that WE DON'T GET TO OPT OUT of the Federal Reserve system. Whatever they say has the coerced backing of every person using FRNs.



And if he does or doesn't, lets let him. The Federal Reserve doesn't give a flying heap what this economics professor or that would do, individually or with cohorts.

Lastly, IS-LM and other econometric truisms don't at all analyze the responses to policy. They don't look to changes in incentives, behaviors, or value judgements of well being of the individuals in a society. They, from the start, abstract away from individuals acting as independent thinkers in a market and towards treating money and commodities as perfect fluids and atomistic particle flows.

I applaud you paying attention and memorizing your Econ 302, but the attack on my question was unwarranted. I understand what you are saying, and my question was meant to illicit from this professor a line of thought - not be an actual recommendation for action.

So to summarize, now you are saying you understand why your argument was illogical but now you are trying to critique central planning in general. Um, that was exactly the other point I was just trying to make. The professor sees his job mostly as one of positive economics, trying to teach people how the world will respond to different shocks. This is different than normative economics, which is about determining the correct policy responses. Of course good positive economics is necessary for good normative economics, but positive economics is important in its own right. It seems idiotic to critique good positive economics because it has bad normative implications you don't like. You should say why the economics doesn't describe the world accurately.

Your other point was of course the Lucas critique, which hopefully every economics class at least mentions at some point. Its the idea that any empirical relationship you estimate between data will change if government changes policies because people change their expectations and beliefs in response to government actions. I would hope every Macro course in the country would at least mention the Lucas critique.

 

[mainstream economist]

Yep, although I'm not surprised. He's actually a nice guy, and I have gotten him to talk favorably about Austrian views like sound money before. He is not familiar with the Austrian school or business cycle theory, though he has said he has read Hayek and liked him. Ultimately though, he is an avowed follower of Keynes, and a huge believer in me....err Bernanke. I was hoping some of you could give me some talking points to bring up in class. We are now exclusively covering demand side economics and it is starting to drive me crazy, haha. I'm fairly educated on Austrian economics, having read Hayek, some Mises (and Mises.org!) and of course Ron Paul, but I would really like some outside help, particularly when it comes to all the equations and models that aren't really presented in Austrian thought.

Last class we talked about the Keynesian cross, and how this revolutionized economics. Next we will be talking about the IS-LM mode (IS stands for investment and saving, LM for money and liquidity), which builds on the Keynesian Cross. A major part of the lecture will be on monetary stimulus. For those of you more familiar with Keynesian theory than I, what would be some good non-argumentative questions to raise or points to bring up?

Oh I found this interesting...the guy who wrote the textbook, N. Gregory Mankiw, was Bush's former economic adviser and is now the the adviser to Mitt Romeny. So one more strike against Mittens.

I sympathize with you, but what is the goal you wish to accomplish by challenging the professor?

1) Do you aim to change the professor's opinions and have him renounce his Keynesian views? Reasonable prediction: It will NEVER happen.
2) Do you aim to change your classmates' opinions by defeating your professor's arguments in their eyes? Reasonable prediction: Possibly, but the professor will have time to argue his counterpoints and he has an air of authority that you do not have. Your classmates may resent you for interrupting the class since they will be tested on the professor's views and not on yours. You may be able to achieve more by targeting them individually after class.
3) Do you want to help Dr. Paul win the nomination? Reasonable prediction: You might make more of an impact by joining the Phone From Home program or donating to the campaign.

I beg you, please try the Phone From Home program if you have not done so already.

Also, if you just want to raise some questions about what the professor is teaching without trying to defeat him, I suggest asking the following question:

Q) What logical argument can be made in favor using aggregate demand curves for macroeconomic analysis (as is the case in the Keynesian cross models) when the Sonnenschein-Mantel-Debreu Theorem has conclusively proven that individual demand functions cannot be aggregated in an analytically tractable way except under extremely restrictive assumptions?
A) The real answer is that no such logical argument can be made. If the professor does not concede at least that point immediately, then just say "I am not convinced, but thank you for taking the time to answer" and don't argue the point any further with him. You will have more success talking to your classmates later. Also, Phone From Home!!

Challenging professors is NEVER a good idea. Not because they are always right, but because they will never admit that their course material is wrong unless you are talking about typos and the like.

 

[low preference guy]

My advice to the OP: Do what you think is right, not what other people tell you. Both challenging the proof or not doing it can be right.

 

[ababba]

Q) What logical argument can be made in favor using aggregate demand curves for macroeconomic analysis (as is the case in the Keynesian cross models) when the Sonnenschein-Mantel-Debreu Theorem has conclusively proven that individual demand functions cannot be aggregated in an analytically tractable way except under extremely restrictive assumptions?
A) The real answer is that no such logical argument can be made. If the professor does not concede at least that point immediately, then just say "I am not convinced, but thank you for taking the time to answer" and don't argue the point any further with him. You will have more success talking to your classmates later. Also, Phone From Home!!

.

AD comes from the quantity equation MV=PY and is a truism, if M and V are fixed there is a trade off between P and Y. You don't need to aggregate individual demand to get AD.

 

[mainstream economist]

AD comes from the quantity equation MV=PY and is a truism, if M and V are fixed there is a trade off between P and Y. You don't need to aggregate individual demand to get AD.

A truism is something that is self-evident and clearly true. I object to the characterization of AD as a truism. AD always exists in real life. As long as there are a finite number of people on earth, the hypothetical sum of their demand functions always exists. The real question is what is the form of that AD and whether the assumptions about that form and the assumptions that are used to derive that form are reasonable. One way to examine whether those assumptions are reasonable is to examine what assumptions on individual demands are needed for the aggregate demand to take the desired form (since it is the case that the equation "AD=sum of individual demands" should hold in all economic models, Keynesian or otherwise).

MV=PY is an accounting equation and nothing more. Making the leap of deriving AD from MV=PY carries hidden aggregate behavioral assumptions about the endogenous relationships between variables (P and V in particular).

Of course, then there is also the derivation of aggregate demand from Keynes' own writings on the Mises.org link that was posted earlier. It clearly carries with it aggregate behavioral assumptions not justified from first principles of individual action. For example, what assumptions on individual demand functions must one make in order to guarantee that their sum will be an aggregate demand function that implies a constant marginal propensity to consume regardless of income level? Are those assumptions actually reasonable under closer examination?

We haven't even entered the realm of questioning whether it is reasonable to aggregate goods into one generic final output good (but that is a different sort of aggregation).

Macroeconomics as we know it is a minefield of convenient hidden assumptions upon closer examination.

 

[ababba]

A truism is something that is self-evident and clearly true. I object to the characterization of AD as a truism. AD always exists in real life. As long as there are a finite number of people on earth, the hypothetical sum of their demand functions always exists. The real question is what is the form of that AD and whether the assumptions about that form and the assumptions that are used to derive that form are reasonable. One way to examine whether those assumptions are reasonable is to examine what assumptions on individual demands are needed for the aggregate demand to take the desired form (since it is the case that the equation "AD=sum of individual demands" should hold in all economic models, Keynesian or otherwise).

MV=PY is an accounting equation and nothing more. Making the leap of deriving AD from MV=PY carries hidden aggregate behavioral assumptions about the endogenous relationships between variables (P and V in particular).

Of course, then there is also the derivation of aggregate demand from Keynes' own writings on the Mises.org link that was posted earlier. It clearly carries with it aggregate behavioral assumptions not justified from first principles of individual action. For example, what assumptions on individual demand functions must one make in order to guarantee that their sum will be an aggregate demand function that implies a constant marginal propensity to consume regardless of income level? Are those assumptions actually reasonable under closer examination?

We haven't even entered the realm of questioning whether it is reasonable to aggregate goods into one generic final output good (but that is a different sort of aggregation).

Macroeconomics as we know it is a minefield of convenient hidden assumptions upon closer examination.

The truism is if the quantity equation is an accounting identity, then there is a negative relationship between P and Y for a fixed MV. This is just math. Thus, I can do analysis of real GDP Y without worrying about aggregation theorems. As long as goods can all be denominated in the same currency units this works.

Most Macro models are not literally true, they are just simplified mathematical approximations to something important that people want to model. They are not exact but can still highlight something important about the economy.

 

[Steven Douglas]

...the notion that Keynesian economics means government intervention is a fantasy. Keynesian economics is sticky prices and a liquidity trap. Its not government intervention.

Does the Federal Reserve engage in intervention of any kind? If so, would not the Federal Reserve Act of 1913 (and all subsequent modifications) count as Keynesian intervention by proxy? Or is this the owner of the dog he turned loose long ago not accountable?

What am I missing?

 

[mainstream economist]

The truism is if the quantity equation is an accounting identity, then there is a negative relationship between P and Y for a fixed MV. This is just math. Thus, I can do analysis of real GDP Y without worrying about aggregation theorems. As long as goods can all be denominated in the same currency units this works.

Most Macro models are not literally true, they are just simplified mathematical approximations to something important that people want to model. They are not exact but can still highlight something important about the economy.

Do we actually disagree? Maybe we are just parsing things differently. That is always a possibility.

Fixed MV is not a good assumption to make if you think that there's any reason for MV to be jointly determined along with other variables. For example, consider V as a function of (P,Y), say V=z(P,Y). Now everything breaks down. It would be hard to even derive a downward sloping demand curve without assumptions about z. You do have to worry about aggregation theorems because you need to think about what is a reasonable shape for the function z. If you assume something about the shape of the function z, you have to worry about whether that is too strong of an implicit assumption on the preferences it is aggregating.

The problem with macro models is not that they are not literally true. All micro models are not literally true either. The problem with macro models is that they make too many assumptions and many of them are not even explicitly stated. I do not dispute that we can still learn some things from macro models (mostly economic intuition), but I do not think that what we can learn from them is enough to engineer the economy.

 

[anaconda]

Here's one I'd like to know:

The Keynesian Cross assumes that investment, I, is exogenous to the model. Classical economics says that government spending, G, is completely negated by reductions in consumption, C, and private investment, resulting in a complete wash (known as "crowding out"), and therefore no advantage for government borrowing/spending whatsoever.

So my question for the teacher would be: Why is Keynes asking us to suspend the classical notion that crowding out does not negate government spending completely?

 

[ababba]

Here's one I'd like to know:

The Keynesian Cross assumes that investment, I, is exogenous to the model. Classical economics says that government spending, G, is completely negated by reductions in consumption, C, and private investment, resulting in a complete wash (known as "crowding out"), and therefore no advantage for government borrowing/spending whatsoever.

So my question for the teacher would be: Why is Keynes asking us to suspend the classical notion that crowding out does not negate government spending completely?

I'm not sure where you got the assumption but investment isn't exogenous in IS-LM (depends negatively on the real interest rate) and the Keynesian cross doesn't involve investment, it is based on actual and planned expenditures, and it is used to demonstrate the multiplier.

 

[ababba]

Do we actually disagree? Maybe we are just parsing things differently. That is always a possibility.

Fixed MV is not a good assumption to make if you think that there's any reason for MV to be jointly determined along with other variables. For example, consider V as a function of (P,Y), say V=z(P,Y). Now everything breaks down. It would be hard to even derive a downward sloping demand curve without assumptions about z. You do have to worry about aggregation theorems because you need to think about what is a reasonable shape for the function z. If you assume something about the shape of the function z, you have to worry about whether that is too strong of an implicit assumption on the preferences it is aggregating.

The problem with macro models is not that they are not literally true. All micro models are not literally true either. The problem with macro models is that they make too many assumptions and many of them are not even explicitly stated. I do not dispute that we can still learn some things from macro models (mostly economic intuition), but I do not think that what we can learn from them is enough to engineer the economy.

When I draw a demand curve in Micro I never assume that the things that shift the demand curve are independent from price and quantity, that seems like a really obvious bad assumption for any form of a demand curve. It doesn't affect our ability to draw a demand curve, it may make thinking about shifts in the curve a more complicated process.

What is the AD/AS model supposed to do? Its supposed to tell us something about what happens to output in the price level in response to monetary expansion or a change in inflation expectations. It can to a pretty good job of this even if we don't understand the exact functional forms for V as long as an increase in M raises MV and as long as the change in inflation expectations doesn't change V in such a way that it offsets the shift in the AS. Thinking about fiscal policy here is a high level question that most courses wouldn't cover, which is why they do IS-LM.

AS is a curve with much more ridiculous assumptions. Like if you tried to explain Calvo pricing to someone they would laugh you out of the room.

 

[Steven Douglas]

ababba, in case you missed it from the last page:

...the notion that Keynesian economics means government intervention is a fantasy. Keynesian economics is sticky prices and a liquidity trap. Its not government intervention.

Does the Federal Reserve engage in intervention of any kind? If so, would not the Federal Reserve Act of 1913 (and all subsequent modifications) count as Keynesian government intervention by proxy? Or is this a case where the owner of the dog he turned loose long ago believes he has washed his hands and is no longer accountable for anything it does?

What am I missing?

This was not asked rhetorically, I really am curious as to your take on it, and would like to be corrected if I am wrong, or missing something.

 

[mainstream economist]

It can to a pretty good job of this even if we don't understand the exact functional forms for V as long as an increase in M raises MV and as long as the change in inflation expectations doesn't change V in such a way that it offsets the shift in the AS.

Summary: "It can do a pretty job if we assume X, Y, and Z." I agree.

It sounds to me that we are not disagreeing on the main point. We just seem to differ on our feelings about this. I feel that we have to take seriously the logical implications of X, Y, Z on individual demands. You seem not to agree on that point. I'll chalk that up to a difference in philosophy. We wouldn't be the first people on earth to have that disagreement.

 

[libertybrewcity]

transfer to George Mason. A very Austrianish econ program. Three active libertarian groups and plenty of liberty-minded people. I have a RP sign on my window and people knock it on it nearly everyday asking about him!

 

[anaconda]

I'm not sure where you got the assumption but investment isn't exogenous in IS-LM (depends negatively on the real interest rate) and the Keynesian cross doesn't involve investment, it is based on actual and planned expenditures, and it is used to demonstrate the multiplier.

Was not talking about IS-LM. Was talking about Keynesian Cross. Keynesian cross depicts an "aggregate expenditure" line (C+I+G) intersecting with the 45 degree line (where spending = income). "I" (investment) is most definitely included in the Keynesian aggregate expenditure line. But it is considered to be determined outside the model ("exogenous"), and therefore unaffected by an increase in G. My question is how and why Keynes assumes that an increase in G doesn't simultaneously diminish both I and C equally, as the classical school suggests.

See last sentence in second paragraph:

http://www.george.irvin.com/MASD1/session4.htm

 

[Steven Douglas]

ababba, could I at least have a reason, however brief (you can even insult me if you would like, I won't take it personally), as to why there was no response to my questions? Even if you found them not worthy of a response, for whatever reason, would you at least state this for the record?

 

[RobHino]

I thought this was a great lecture, and it includes models to explain the Austrian Theory. The introduction is about 5 minutes long. You could recreate the models in this video. And then in an after class scheduled discussion, you could say you're having a hard time understanding how they compare to the Keynesian models from his lecture.

http://www.youtube.com/watch?v=zhoFOyy7rbo

 

[ababba]

ababba, could I at least have a reason, however brief (you can even insult me if you would like, I won't take it personally), as to why there was no response to my questions? Even if you found them not worthy of a response, for whatever reason, would you at least state this for the record?

I was out of town for a day, didn't check the forum.

The Fed engages in government intervention. Keynesian economics does not equal government intervention. It is sticky prices and a liquidity trap. It is a positive description of how economies work not a normative description of what policy should be. Your question doesn't make any sense.