Transcript Keynes Seminar 11 February 2009 - Post

Keynes Seminar
11 February 2009
Geoff Tily
Government Economic Service
Keynes, Policy and The General Theory
www.postkeynesian.net © PKSG 2009
Keynes, Policy and The General
Theory
Structure
1.
2.
3.
4.
5.
6.
Monetary policy backdrop: the gold
standard
Public expenditure: history
Theory
Outcome
Implications
Further reading
1. Monetary policy backdrop:
the gold standard
The Gold Standard, 1922-1935
If we restore the gold standard, are we to return
also to the pre-war conceptions of bank rate,
allowing the tides of gold to play what tricks they
like with the internal price level, and abandoning
the attempt to moderate the disastrous influence
of the credit cycle on the stability of prices and
employment?
In truth, the gold standard is already a barbarous
relic.
A Tract on Monetary Reform, 1923, pp. 137-8
Keynes’s Project:
Indeed it is difficult not to be impressed by the
consistency of his main strategic objectives: the full
employment of resources; the achievement of
balance of payments for all countries by methods
that would not be inconsistent with full
employment; as a means to this, a system of
exchange rates that would combine the short-term
virtues of fixity and predictability with the longterm virtues of flexibility; and, as a means to full
employment, low interest rates.
(Keynes’s obituary in the Economic Journal ,
Robinson 1947, p. 45)
The failure of theory
The confusion lay in the futile attempt to
ignore the existence of bank money and
consequently the inter-relationships of
money and bank credit, and to make
representative money behave exactly as
though it were commodity money. (p. 15)
A Treatise on Money, 1930
Outcome:
unemployment rates
Bank rate, 1920 -1950
Post-gold policies, 1932
February, first rate cut to 5% from
6%
 April, Exchange Equalisation Account
instigated
 June, conversion operation
announced, embargo on overseas
loans and final rate cut to 2 %

Action on
other rates:
quantitative
easing
Outcome?
unemployment rates
Off Gold,
September 1931
Off Gold,
April 1933
2. Public Expenditure:
History
Consistent themes
Spending multiplying itself
 Spending paying for itself
 Necessity of the use of (cheap) credit
 Leakages
 Solvable by geometric progression

Chronology (1)







March 1929, Liberal Manifesto
May 1929, Can Lloyd George Do It?
30 May 1929, General Election
[October 1929, Wall Street Crash]
5 November 1929, CX appoints Macmillan
Committee on Finance and Industry
22 January 1930, PM announces Economic
Advisory Council
February & March 1930, Keynes’s five sessions
at Committee, explores ‘Treasury view’
… we are ready with schemes of work which
we can put immediately into operation … .
These plans will not add one penny to
national or local taxation.
Chronology (1)







March 1929, Liberal Manifesto
May 1929, Can Lloyd George Do It?
30 May 1929, General Election
[October 1929, Wall Street Crash]
5 November 1929, CX appoints Macmillan
Committee on Finance and Industry
22 January 1930, PM announces Economic
Advisory Council
February & March 1930, Keynes’s five sessions
at Committee, explores ‘Treasury view’
That a demand for a suit of clothes implies
a demand for cloth; that a demand for
cloth implies a demand for yarns and tops,
and so for wool; that the services of
farmers, merchants, engineers, miners,
transport workers, clerks are all involved –
this is the ABC of economic science. (CW
IX, pp. 106-6)
Chronology (1)







March 1929, Liberal Manifesto
May 1929, Can Lloyd George Do It?
30 May 1929, General Election
[October 1929, Wall Street Crash]
5 November 1929, CX appoints Macmillan
Committee on Finance and Industry
22 January 1930, PM announces Economic
Advisory Council
February & March 1930, Keynes’s five sessions
at Committee, explores ‘Treasury view’
Ramsey
MacDonald
Prime
Minister
1929 - 1931
Philip
Snowden
Chancellor
1929 - 1931
Chronology (1)







March 1929, Liberal Manifesto
May 1929, Can Lloyd George Do It?
30 May 1929, General Election
[October 1929, Wall Street Crash]
5 November 1929, CX appoints Macmillan
Committee on Finance and Industry
22 January 1930, PM announces Economic
Advisory Council
February & March 1930, Keynes’s five sessions
at Committee, explores ‘Treasury view’
Sir Richard V.
N. Hopkins
Permanent
Secretary
1942-1945
HMT view (1)
… the decision taken by the Government at the
end of 1925 to restrict grants for relief schemes
was based mainly on the view that, the supply
of capital in the country being limited, it was
undesirable to divert any appreciable proportion
of this supply from normal trade channels.
(British Government to ILO, 1927, cited in Kahn
1931)
HMT view (2)
It is the orthodox Treasury dogma,
steadfastly held, that whatever might be
the political or social advantages, very
little additional employment and no
permanent additional employment, can, in
fact, as a general rule, be created by State
borrowing and State expenditure. (CW IX,
pp. 115)
Chronology (2)





September 1930, Richard Kahn circulates
primitive analysis of multiplier to EAC subCommittee, the Committee of Economists
October 1930, A Treatise on Money published
March 1931, ‘Proposals for a Revenue Tariff’
May 1931, Macmillan Report published
June 1931, Kahn’s article published in the
Economic Journal
July 1931 European banking crisis
 31 July 1931, May Committee Report published
 24 August, National Government formed under
MacDonald and elected in November

It is important, we are told, not to overlook the
beneficial repercussions that will result from the
expenditure of the newly-employed men's
wages. But little is done to evaluate these
repercussions in concrete terms. The main
purpose, though not the only purpose, of this
article is to outline the means by which this gap
could be filled, …
 It is, however, important to realise that the
intelligent co-operation of the banking system is
being taken for granted.
 Cost of investment = saving on dole + increase
in imports + increase in unspent profits. (‘Mr
Meade’s relation’)

Chronology (2)





September 1930, Richard Kahn circulates
primitive analysis of multiplier to EAC subCommittee, the Committee of Economists
October 1930, A Treatise on Money published
March 1931, ‘Proposals for a Revenue Tariff’
May 1931, Macmillan Report published
June 1931, Kahn’s article published in the
Economic Journal
July 1931 European banking crisis
 31 July 1931, May Committee Report published
 24 August, National Government formed under
MacDonald and elected in November

Neville
Chamberlain
Chancellor
1931 - 1937
Chronology (3)









21 September 1931, off gold
1932 Budget, EEA etc
Follow up in EJ, Warming and Kahn (June 1932)
and also Giblin in Australia
17 October 1932, signatory to letter supporting
public works in The Times
4 March 1933, FDR takes office
13-16 March 1933, The Means to Prosperity
20 April 1933, US off gold
June & July 1933, World Economic Conference
31 December 1933, Keynes’s open letter
… savings are always and necessarily
equal to investment: that is a mere truism,
… Whatever the level of investment, funds
are always available to pay for it.
Chronology (3)









21 September 1931, off gold
1932 Budget, EEA etc
Follow up in EJ, Warming and Kahn (June 1932)
and also Giblin in Australia
17 October 1932, signatory to letter supporting
public works in The Times
4 March 1933, FDR takes office
13-16 March 1933, The Means to Prosperity
20 April 1933, US off gold
June & July 1933, World Economic Conference
31 December 1933, Keynes’s open letter
… to create wealth will increase the
national income and that a large
proportion of any increase in the national
income will accrue to an Exchequer,
amongst whose largest outgoings is the
payment of incomes to those who are
unemployed and whose receipts are a
proportion of the incomes of those who
are occupied. (CW IX, p. 338)
Chronology (3)









21 September 1931, off gold
1932 Budget, EEA etc
Follow up in EJ, Warming and Kahn (June 1932)
and also Giblin in Australia
17 October 1932, signatory to letter supporting
public works in The Times
4 March 1933, FDR takes office
13-16 March 1933, The Means to Prosperity
20 April 1933, US off gold
June & July 1933, World Economic Conference
31 December 1933, Keynes’s open letter
Dear Mr President,
You have made yourself the trustee for those in
every country who seek to mend the evils of our
condition by reasoned experiment within the
framework of the existing social system.
…
In the field of domestic policy, I put in the
forefront, for the reasons given above, a large
volume of loan expenditure under government
auspices. …
Your obedient servant,
J. M. KEYNES
(New York Times, 31 December 1933, CW IX,
pp. 289-297)
3. Theory
Multiplier, prices, financing,
saving, government borrowing,
trade and estimation
No.
C
Y
… I know for certain
that the multiplier is
not always 2
It should not
be difficult to
compile a
chart of the
marginal
propensity to
consume at
each stage of
a trade cycle
from the
statistics (if
they were
available) of
aggregate
income and
aggregate
investment at
successive
dates.
Multiplier in the GT (1)

Law of consumption:
The fundamental psychological law, upon which
we are entitled to depend with great confidence
both a priori from our knowledge of human
nature and from the detailed facts of experience,
is that men are disposed, as a rule and on the
average, to increase their consumption as their
income increases, but not by as much as the
increase in their income. (CW VII, p. 96)
Multiplier in the GT (2)

Derived via MPC and NA identity (in closed
economy)
C /Y = c , where 0 < c < 1
Y = C + I
Y =

1
1-c
I
Note equivalence to summing sequence:
1 + c + c2 + … = 1 / (1 – c)
Keynes on prices (Ch20, §IV,V):
Hence, in general, supply price will increase as output from
a given equipment is increased. Thus increasing output will
be associated with rising prices, apart from any change in
the wage-unit.
It is probable that the general level of prices will not rise
very much as output increases, so long as there are
available efficient unemployed resources of every type. But
as soon as output has increased sufficiently to begin to
reach the “bottlenecks”, there is likely to be a sharp rise in
the prices of certain commodities.
When a further increase in the quantity of effective demand
produces no further increase in output and entirely spends
itself on an increase in the cost-unit fully proportionate to
the increase in effective demand, we have reached a
condition which might be appropriately designated as one of
true inflation.
Financing of spending
New money: banks to create credit
 Do so at very low interest
 Created savings can then flow into bonds,
which repays banks

liabilities
+ΔM
liabilities
-ΔM
+ΔB
Saving: crowding out
Because income increases, eventually
saving is generated to exactly same extent
of original expenditure, i.e. no crowding
out
 Keynes worked through the NA algebra:

Process analysis
 Really, it’s a monetary phenomenon

Or ‘process’ analysis
(1-C)(1+C+C2+ …
= (1-C) / (1-C) = 1
Cr (1-C)
C2
spend
C
C –C2 = C (1-C)
1
save
1-C
Saving: crowding out
Because income increases, eventually
saving is generated to exactly same extent
of original expenditure, i.e. no crowding
out
 Keynes worked through the NA algebra:

Process analysis
 Really, it’s a monetary phenomenon

Government finances

Gain of tax on multiplied income (income,
CT and VAT)
– Eg if average rate of tax = 50%, multiplier =2

Saving on dole
Trade

Leakage to overseas
Amended formula
Y =
1
I
1–c+m
NB savings still created, but overseas. BoP
arithmetic has them returning
 Remain to be convinced that this leakage is
greatly more significant than in Keynes’s time

Other implications

No account taken of beneficial outcomes
outside the original multiplier process as
confidence restored and firms’ cashflow
recovers
Estimating the multiplier
No official statistics in 1930
 Colin Clark’s figures, National Income 1924-31,
published in 1932
 Kahn: 2
 MTP: 2, but safer 1 ½, even safer 1 1/3


“[in the US] the multiplier seems to have been less than 3 and
probably fairly stable in the neighbourhood of 2.5. This suggests a
marginal propensity to consume not exceeding 60 to 70 per cent. –
a figure quite plausible for the boom, but surprisingly, and, in my
judgment, improbably low for the slump” (GT, p. 128).

For 1929-37 as 1.532 and for 1934-37 as 2.082
(Colin Clark’s estimates)
Marginal propensities
1
0.8
0.6
0.4
0.2
0
1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
-0.2
C
M
trend
trend
-0.4
Multiplier
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
Obama’s multipliers

‘The job impact of the American recovery
and reinvestment plan’
http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf

FT 23/1
“Christina Romer, chairman of the CEA,
estimates a multiplier of 1.5”
Barro “with partial crowding out the multiplier
will be a lot less than one”
Rogoff “Academic economists are far more
uncertain about the impact of the fiscal stimulus
than Wall Street … The range of estimates is
very wide. But given the situation we’re in it is
certainly worth trying”
Marginal propensities, US
2
1.5
1
C
0.5
M
0
1930 1934 1938 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
-0.5
-1
Multiplier, US
6
4
2
0
1930 1934 1938 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
-2
-4
-6
4. Outcome
UK GDP(E)
Level:
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
Change:
C
G
M
Y
C
G
M
Y
£ million
3939
425 1325 4406
3983
435 1359 4492
44
10
34
86
3932
443 1185 4443
-51
8 -174
-49
3805
443
989 4063 -127
0 -196 -380
3683
431
823 3913 -122
-12 -166 -150
3696
430
784 3920
13
-1
-39
7
3802
446
845 4170
106
16
61
250
3935
483
898 4280
133
37
53
110
4080
536
976 4540
145
53
78
260
4289
617 1159 4910
209
81
183
370
4392
749 1062 5170
103
132
-97
260
4539 1179 1190 5470
147
430
128
300
Real outcomes
Unemployment
18
GDP growth, volume
8.0
16
6.0
14
4.0
12
2.0
10
0.0
8
1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937
6
-2.0
4
-4.0
2
-6.0
0
1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939
-8.0
Debt, % GDP
300.0
1946
250.0
200.0
1933
150.0
100.0
1940
50.0
1975
0.0
1858 1866 1874 1882 1890 1898 1906 1914 1922 1930 1938 1946 1954 1962 1970 1978 1986 1994 2002
Action on
other rates:
quantitative
easing
FDR spending

Eg Works Progress Administration, 1932-1945
–
–
–
–
–
644,000 miles of roads,
122,760 bridges,
38,800 schools,
2,300,000 public toilets,
8,000 swimming pools, etc
Peter Fearnon estimates that between January
1933 and December 1940 $21.1 billion was
spent on public relief and federal works
programmes
 3 per cent of total GDP over the same period

– today: $420 billion a year in the US; £42 billion in UK
US GDP(E)
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
Level:
Y
G
103.6
91.2
76.5
58.7
56.4
66
73.3
83.8
91.9
86.1
92.2
101.4
Change:
Y
C
9.4
10
9.9
8.7
8.7
10.5
10.9
13.1
12.8
13.8
14.8
15
-12.4
-14.7
-17.8
-2.3
9.6
7.3
10.5
8.1
-5.8
6.1
9.2
I
-7.3
-9.4
-12
-2.8
5.6
4.4
6.3
4.6
-2.5
2.9
4.1
X
-5.7
-4.9
-4.6
0.4
2
3
1.9
3.6
-5.1
2.2
4.3
M
-1.5
-1.5
-0.9
0
0.6
0.2
0.2
1
-0.2
0.2
0.9
G
-1.5
-1.2
-1
0
0.3
0.8
0.2
0.8
-1.2
0.3
0.3
0.6
-0.1
-1.2
0
1.8
0.4
2.2
-0.3
1
1
0.2
5. Closing remarks
Implications of Keynes

Charles Kindleberger, The World in
Depression, 1929-39:
"A nation can finance anything it can produce."
Taking London as our example, we should demolish the
majority of the existing buildings on the south bank of the river
from County Hall to Greenwich, and lay out these districts as
the most magnificent, the most commodious and healthy
working-class quarter in the world. The space is at present so ill
used that an equal or larger population could be housed in
modern comfort on half the area or less, leaving the rest of it to
be devoted to parks, squares and playgrounds, with lakes,
pleasure gardens and boulevards, and every delight which skill
and fancy can devise. Why should not all London be the equal
of St James’s Park and its surroundings? The river front might
become one of the sights of the world with a range of terraces
and buildings rising from the river. The schools of South London
should have the dignity of Universities with courts, colonnades
and fountains, libraries, galleries, dining-halls, cinemas and
theatres for their own use. Into this scheme should be
introduced the utmost variety. All our architects and engineers
and artists should have the opportunity to embody the various
imagination, not of peevish, stunted and disillusioned beings,
but of peaceful and satisfied spirits who belong to a
renaissance. (Keynes,The Listener, August 1936)
Thanks to Graham Turner of GFC economics, and author of
the Credit Crunch. Dated 6 January.