Keynes and the Long Run
Keynes and uncertainty about the the future: about childlessness or philosophical assumptions?
Political economist Robert Skidelsky, in a piece from last week’s WaPo entitled True, Keynes cared little about the long run. But that wasn’t because he was gay, deals with Keynes’ famous phrase in the aftermath of Niall Ferguson’s intemperate comments on the subject.
First, the basic context:
Speaking to an investors conference early this month, historian Niall Ferguson was asked what John Maynard Keynes meant by his famous statement that “in the long run, we are all dead.” In an ad lib response, Ferguson suggested that Keynes’s philosophy reflected the fact that the “effete” economist was gay and childless, and therefore did not care much about the fate of future generations.
Second, the quote in question:
The passage under debate — which comes from Keynes’s 1923 book, “A Tract on Monetary Reform” — discusses what is known in economics as the quantity theory of money: the notion that a change in a nation’s money supply causes a proportionate change in prices. Keynes, whose book “The Economic Consequences of the Peace,” a searing attack on the Treaty of Versailles, had already made him famous, pointed out that “in the long run,” this relationship was “probably true.” But, he went on, “this long run is a misleading guide to current affairs. In the long run we are all dead.”
Third, the issue at hand:
Keynes’s focus on the short run was grounded in the philosophical principle of “insufficient reason.” If individuals have no sufficient reason to believe that a good situation today will have adverse long-term consequences, it must always be rational for them to aim to maximize their short-term good.
What is striking about this is that is generally considered a conservative principle that policies always have unintended consequences and that human reason cannot fully anticipate what comes in the future. Indeed, Skidelsky continues the above passage with a linkage to an essay Keynes wrote on Edmund Burke, the noted conservative thinker:
In an essay on the conservative philosopher Edmund Burke, Keynes translated this moral principle of individual behavior into the political principle of prudence:
“Burke ever held, and held rightly, that it can seldom be right . . . to sacrifice a present benefit for a doubtful advantage in the future. . . . It is therefore the happiness of our own contemporaries that is our main concern; we should be very chary of sacrificing large numbers of people for the sake of a contingent end, however advantageous that may appear. . . . We can never know enough to make the chance worth taking. . . . There is this further consideration . . . it is not sufficient that the state of affairs which we seek to promote should be better than the state of affairs which preceded it; it must be sufficiently better to make up for the evils of the transition.”
This leads to the money graf:
This is the bedrock of Keynesian economics. So Ferguson was quite right to say that Keynes discounted the future — but it was not because of homosexuality, it was because of uncertainty. Keynes would have rejected the claim of today’s austerity champions that short-term pain, in the form of budget cuts, is the price we need to pay for long-term economic growth. The pain is real, he would say, while the benefit is conjecture.
Regardless of one’s views on Keynesian policy recommendations, it is difficult to think the above through and say that it is lacks intellectual foundation or, worse, to attribute it to some notion that Keynes’ lack of progeny was its source.
And for what it is worth, Skidelsky concludes with some partial criticism of Keynes:
Personally, I think Keynes’s view of the future as radically uncertain is too sweeping. Although it is impossible to assign reliable statistical probabilities to specific events — Will North Korea launch a nuclear strike in the next five years? What will be the price of oil in 10 years? — we do have some experience of the likely long-term consequences of bad behavior, and it would be foolish to ignore it. The future is not a random bet.
But in many matters, politicians would be well advised to follow Keynes’s advice and prefer the present generation to future ones. There is only so much pain voters will tolerate. And there is insufficient reason to believe that today’s austerity will bring tomorrow’s prosperity.
That last point is what the debate ought to be about. Too many pretend that pain now equals gain later,when we, in fact, lack evidence to prove that assertion.
A parting note, the phrase “In the long run, we’re all dead” makes for a great line in a rap battle:
A couple years after making that statement Keynes married a woman, to whom he remained married until his death. By all accounts he was quite dismayed that she wasn’t able to have children.
What’s good for the goose is good for the gander, no? If the above is a truism, then isn’t it also the case that there is insufficient reason to believe that today’s indulgence will bring tomorrow’s prosperity? In other words, doesn’t the uncertainty work both ways?
Keynes was arguing economics as practiced was largely useless because it failed to contribute to well-being, focusing on distant abstractions at the expense of peoplenow. Unfortunately this remains as true today as it did 95 years ago. Notice the absolute failure of the mainstream to correctly forecast anything at all, yet we’re told that because of an accounting structure we’re going to be in huge trouble unless we immediately commence self-flagellation. Practicioners continue to pretend their models are reality, ignoring their repeated failures.
There’s a reason Alfred Nobel didn’t create a prize in economics; he viewed economists as snake-oil salesmen.
@Andy: Austerity today reduces tomorrow’s productive capacity by inhibiting investment. That means lower standards of living and less material wealth.
@Ben Wolf: As you noted in your first comment, the mainstream cannot forecast anything at all. I also agree with you about modelling. So, in light of that, how can you be so certain in your own forecast regarding the effect of austerity?
@Andy: Macroeconomic trends can be forecast by watching flows financial assets between sectors; we call this Sectoral Balances, a technique pioneered by Wynne Godley who was consistently the most accurate forecaster in Britain. Combine it with MMT’s analytical toolset and one can successfully forecast interest rates, bond yields, the futility of “expansionary contraction” unemployment, growth (or lack thereof) and the effects of QE and of sovereign credit downgrades.
The GFC was forecast by almost every heterodox economist. The eurozone crisis was predicted step-by-step in 1996 by Warren Mosler. There are methods which work.
Besides, have I steered you wrong yet when making a call?
Besides, have I steered you wrong yet
And of course that has much to do with Keynesian Economics.
What makes austerity cuts a “forecast?” If you cut government spending and raise taxes, you directly inflict consequences onto people that pay taxes and use government spending. Those consequences aren’t forecasts, they are immediate cause and effect. The entire point is that conflating immediate pain with possible future benefits isn’t always a great tradeoff.
In short, there is sufficient reason to believe that austerity will bring austerity and insufficient reason to believe it will bring future benefits.
That’s the truism. Replace “future benefits” with “future pain” and your point is still irrelevant. Austerity is austerity and there isn’t some world where people having their taxes raised and their benefits cut isn’t a sacrifice.
I would support that forecasting is imprecise, and that it requires contined and diverse attempts at improvement … but that is not the same as saying we’d be better off without the attempts, the answers, and continuous process improvement. See also models of future Social Security solvency, or for that matter climate.
Modeled “best guesses” are used throughout our lives.
@Console: I’m talking long-term vs short term. Yes, in the short term austerity hurts. The question is whether it would result in a better economic future than the alternative. Steven wrote in his post:
And I think that’s true. The future is hard to predict. Economic forecasting has never been very good even on modest timelines. My point is that the future is just as unpredictable with a policy of indulgence as it is with austerity, all else being equal. It is right to point out that austerity won’t, by itself, bring a bright future but neither will indulgence.
@Ben Wolf: Well, this is kind of what I’m talking about. On one hand you rightly disparage economic forecasting but you make an exception for the school of thought you subscribe to. You might be right in the end, but I’m skeptical of macroeconomics generally.
My own view on this is that it’s not solely or even mainly a question of austerity vs. indulgence. Cutting ineffective or irrelevant programs and spending may be austerity, but it may also be a net plus and therefore a good idea. Cutting efficient and necessary programs/services will probably turn out badly. In other words, the details matter.
@john personna: Oh, I agree. I’m in the business of prediction, after all. And some things are easier to predict than other things. I’m just saying you can’t have it both ways regarding future uncertainty.
No one can “prove” any future, which is why it is a fight of comparisons, and which past this resembles.
Let us note though that Austerians are hurting now because their “we are Greece” narrative was shot to hell.
It is kind of interesting that the right, as a unit, moves from there to “no one knows!”
BTW, for related reasons I expect gold to continue its fall in this coming week.
So my forecast is on record 😉
If Hilsenrath is correct, you can expect all commodities to take a tumble this week, not just gold.
All things being equal, indulgence is still preferable to pain. That’s the entire philosophical point. If the future is uncertain, then you probably shouldn’t do things that screw people over in the name of a good future. You’d be doing immediate good however if you maximized people’s immediate happiness.
I can’t see beyond that paywall, but perhaps this is similar?
A Professional Preps for the End of QE
I think it’s good, despite a very odd ending metaphor drawn for readers of romance novels (last two paragraphs).
The main reason I think gold is falling though is that it isn’t just (or primarily) a commodity. It is a fear index. It is falling because the scary Greek scenario has broken. Gold bugs now try to cobble together a “buy gold” story without the fear that the dollar and/or US bonds will wither up and blow away … good luck.
@Andy: The reason MMT is useful is its political agnosticism. It’s not really a school of thought but a framework for analysis. It observes, then forecasts, as opposed to the mainstream methodology of theorizing and refusing to internalize empirical evidence. For god’s sake these are people who insist on the existence of NAIRU and then argue it can’t be measured, observed or predicted. Their work is completely infected with politics and assumptions.
You can be a libertarian, a conservative, a liberal, a fascist or a communist and still accept MMT. It is useful because it filters out the primary source of bias in the study of economics.
Well this bit from wikipeida is interesting in that regard. Interesting because you have told us here that from the MMT perspective deficits don’t matter, as long as a country controls its currency.
Also amusing because you’ve found a school more spendy than Krugman.
Clearly, then, we need to significantly reduce taxes, subsidize alcohol and coffee, and greatly increase government spending.
@john personna: I defy you to find a quote where I state that deficits are not relevant. What I have said is that deficits do not matter in the way most people think, in terms of solvency. They always matter in terms of aggregate demand management.
Wikipedia is not a good source for this.
@Ben Wolf: I would put it a bit differently – I think deficits matter because all the ways in which deficits are reduced (except growth) come with negative consequences.
@Andy: It definitely requires a continuous balancing act. In the end it isn’t really government deficits which are of concern, it’s the non-government sector’s desired surplus. Government is always operating in reaction to spending/investment/savings patterns in the outside sectors. There are no budget measures it can take that can not be derailed if the rate of net saving rises or falls, so a wise government (which we don’t have) would, in my opinion, build in extremely strong automatic stabilizers to remove the politics from the process and let people determine what is best for them.
I know I harp on it a lot, but a Jobs Guarantee would be one of the most powerful tools we could introduce for full employment and price stability. And it could be implemented in a decentralized way that keeps government from encroaching further into our lives. We do virtually everything in this country from a national top-down perspective; to me MMT is showing us we can do it from the local/individual bottom-up.
Austerity is not the matter. The matter is about keeping a sustainable long term fiscal balance and about keeping a healthy and stable private sector(One of the main roles of public spending).
Creating a long term fiscal balance by sacrificing the present is a strange proposition though. That’s why austerity gets brought up. It’s an even stranger proposition in the face of democracy. Today’s government isn’t bound by yesterday’s. So while it’s true that today’s government can create problems for tomorrow’s government, the sacrifices that today’s government makes may or may not be utilized by tomorrow’s in the first place. You can create “long term fiscal balance” only to watch someone throw it out for tax cuts and two land wars in Asia.
All of this essentially boils down to the same central tenet: Deal with your problems first, then everyone else’s later.