A Marxist/Keynesian critique of Say's Law

Economics Economics Questions
101

First, people don’t hold money in order to never spend it.

But lets assume they did, lets assume Miser #1 burns every dollar of profit he takes in. What happens? Does production cease?

No, production stays constant while prices fall. You have neglected that output is not the only variable here, output can stay constant even given a shrinking monetary base so long as prices fall.

In addition to that, since Miser is adding to the pool of goods in the market without subtracting an equal amount this means that other consumers will receive his share(again, due to the falling prices caused by less competition for consumers goods.)

But if we accept your claim that Miser #1 wants to end up the maximum amount of money possible, we know that he is spending all profits he gets. He is spending them on the purchase of capital goods, in order to gain even more profits. If you claim he is stuffing it under his mattress, then you have contradicted your own stipulation about Miser #1. Your scenario fails.

102

It’s really quite astonishing that I understand that but Steve Keen and many other mainstream economists do not.

103

put even more forcefully, what the Miser ‘supplies’ to the extent that he supplies it (in order to get in return, money he will never spend from buyers - “demanders”), his supply has constituted their demand.

Say’s law! working 100%

and for them to have had the money to give him, they must have had a prior ‘supply’ of their own, to constitute his demand for a particular good , lets call the good unspendable-money (pardoning the obvious oxymoron which those that dont understand Say’s law must hold to)

Says law 99%. no wait, i meant 100%.

104

How is Mr. Keen published in Economic Journals but you aren’t? It blows my mind.

105

You are now making a numerical argument that may make it worth my while to point you in the direction of my work on credit dynamics. Issues that I was going to cover in this thread about aggregate demand always exceeding supply during a credit expansion and always being less than supply during a contraction are covered there. See Figure 16 in that paper.

For literature on the fact that an expanding economy needs aggregate demand to exceed supply, see Minsky (1963), ‘Can “It” Happen Again?’ in Carson, Dean (ed.), Banking and Monetary Studies, Richard D. Irwin, Homewood, reprinted in Minsky (1982),Inflation, Recession and Economic Policy, Wheatsheaf, Sussex, pp. 3–13, where he observes that:

If income is to grow, the financial markets, where the various plans to save and invest are reconciled, must generate an aggregate demand that, aside from brief intervals, is ever rising. For real aggregate demand to be increasing, . . . it is necessary that current spending plans, summed over all sectors, be greater than current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed. It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets. (Minsky 1963 [1982]: 6)

Similar arguments can be found in Schumpeter and Marx.

106

You’re not familiar with the Austrian Business Cycle Theory?

Aggregate demand exceeding supply, a euphemism you are using to mean credit expansion, is what causes the expansion of an economic bubble.

This is not economic growth in the real sense, an expansion in the capital stock, only balance sheets are expanded.

While growth of real incomes is indeed desirable, that does nothing to prove the value of increases in nominal income which can occur with or without increases in real income.

107

By the demand-driven growth process Minsky describes, the origin of economic growth is continual credit expansion. This of course requires an ever expanding money supply. That economic growth is caused in this manner is, to my mind, utterly preposterous. The only thing being increased here is nominal demand, nominal supply, and nominal income.

No, economic growth (i.e. increased living standards /increased real incomes) requires per capita productivity increases. Period. Credit creation has absolutely nothing to do with this.

108

Gee whiz. Read the paper Astroglide.

109

From the article in question Keen states the following on M-C-M’ and its implications.

With the presence of a circuit dominated by the desire to accumulate, the simple harmony of commodity production and consumption (vulnerable only to disproportionality) gives way to the potential for instability arising from speculative overproduction, excessive and insufficient expectations of profit, maldistribution of income, excessive debt, and the whole panoply of macroeconomic issues that believers in Say’s Law cannot comprehend. Say’s ‘Law’ therefore, is not a recondite insight into the nature of a market economy, but evidence of a basic failure to comprehend capitalism

Later on he states this:

Whereas a producer acting in the C-M-C’ manner does ask for money ‘only for the purpose of employing that money again immediately in the purchase of another product’, a producer acting in the M-C-M+ manner asks for money for its own sake (‘exchange-value, and, in particular, the expansion of surplus-value’). While we ‘do not consume money’, people certainly do seek to ‘conceal’ (or accumulate) it. Though a capitalist will undoubtedly consume with part of the money he accumulates, it is not true that ‘he may be considered as already asking for the merchandise which he proposes to buy with this money’ since if he converts all his profit into consumables, he has failed to accumulate wealth – to be a capitalist.

As Marx puts it, capitalists are characterised not by an equality of their supplies and their demands, but by an inequality. This inequality is possible because production mediates between the commodities ‘an industrial capitalist’ purchases (the labour and material inputs to production) and the commodities he sells (the output of the manufacturing process), and production produces a physical surplus that the capitalist hopes to turn into a monetary surplus…

[quote from Marx here]

He then concludes:

…There is an inherent inequality at the core of capitalist society, and the simple balance of Say’s Law collapses. In its place arises a far more complex vision of the functioning – and potential malfunctioning – of a market economy.

…

Marx also realised that in this circuit [M-C-M+] , money has an essentially new role in addition to those of medium of exchange and measure of account: it is now also a measure of accumulation. Failure in accumulation can now result in money being withdrawn from circulation, which in turn can lead to deficiencies in aggregate demand..

[Quote from Marx]
… Money is more than a mere lubricant…

Edit: this part is in response to Jon. The miser does invest his money but unfortunately it is invested in speculative gains on asset markets and stock markets. Which during the boom can be one massive Ponzi scheme drive by a bubble in debt. Which is Minsky all over.

One other important point that isn’t mentioned by Keens is that money allows the continuation of seller to buyer to be broken. It allows someone to hold onto money, rather than purchase. Now why would this occur, it could be due to low time preference but also it could be due to liquidity preference.

I’ll set out my understanding of the Post Keynesian theory for expectations and agent action.

Economic actors have uncertain knowledge of the future, there is no ‘scientific basis on which to form any calculable probability whatever. We simply do not know’. Nevertheless, the necessity for action and for decision compels us…’ to act. We manage to act by the following techniques:

  1. ‘Assume that the present is a much more serviceable guide to the future…’. I.e. the past is immutable

  2. That the ‘existing state of opinion as expressed in prices and the character existing output is based on correct summing up of future prospects, so that we can accept it as such unless and until something new and relevant comes into the picture’.

  3. ‘knowing that our own individual judgment is worthless…’ we rely on ‘judgement of the world which is perhaps better informed…conventional judgement’.

Economic actors construct a fabricated future based on what knowledge they have obtained and their calculations. But when calculations are not possible (such as when there is a high level of uncertainty) agents actions are not guided by calculations but by their emotions; whether they feel optimistic or pessimistic about future outcomes, will direct their action. There is no room for time preference or any sort of rationality. It simply does not occur. It is impossible. Hence the reason why an agent may choose liquidity preference:

Money, it is well known, serves two purposes. By acting as a money of account it facilitates exchange without its being necessary that it should ever itself come into the picture as a substantive object. In this respect it is a convenience which is devoid of significant or real influence. In the second place, it is a store of wealth. So we are told without a smile on the face. But in the world of the classical economy, what an insane use to put it! For it is a recognised characteristic of money as a store of wealth that it is barren, whereas practically every other form of storing wealth yields some interest or profit. Why should anyone outside a lunatic asylum wish to use money as a store of wealth?

Because, partly on reasonable and partly on instinctive grounds, our desire to hold money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future. Even tho this feeling about money is itself conventional or instinctive, it operates, so to speak, at a deeper level of our motivation. It takes charge at the moments when the higher, more precarious conventions have weakened. The possession of actual money lulls our disquietude, and the premium which we require to make us part with money is the measure of the degree of our disquietude.

  • Keynes, 1937, The General Theory, The quarterly Journal of Economics. pp 215 – 216

The continuation from seller to buyer is broken, due to a pessimistic expectation of the future. Only money makes this possible. And it presents the option for persons to keep their money idle rather than investing. This breaks C-M-C’ and M-C-M’. Which is also a direct contradiction to Say he assumes that all expectations regarding money will be that it will lose value and that an agent will want to get rid of it as soon as possible (by purchasing a commodity he desires).

The function of M-C-M’ leads the economy towards a debt induced bubble. When the circuits are broken the bubble breaks and the market experiences a debt-deflation spiral. If prices and wages are flexible and tend to decrease in this situation then the problem is made even worse, as debt becomes harder to service.

No market forces can save the economy from this situation, neither can government depending on the severity, as there is simply too much debt in the system. Either inflation has to be induced to allow for easing of debt servicing or the debt deflation cycle has to be ridden out. Which could a significant amount of time. The natural rate of interest or the equilibrating forces of the market are not there. The market is a dynamic system with multiple points of equilibrium (which the market can tend towards or move away from, but are never reached).

110

While I’m at it, why don’t I read everything you’ve ever written, so then you won’t have to post anything. But if I’m to do this, then you’re required to read everything ever written by von Mises and Rothbard.

Why do you constantly place the onus upon everbody else? If your arguments are misinterpreted, one after the other, thats YOUR fault. Spell out your entire argument for once, and in a manner that’s intellgible and unequivocal. Haven’t seen you do this yet - your writings are, without fail, incomplete, indirect, and confusing.

111

Mash, just to address on the following,

“Why should anyone outside a lunatic asylum wish to use money as a store of wealth?”

Hazlitt answered that quite well,

Perhaps, with a little patience, we could have helped Keynes to understand. They wish or hope or believe that the thousand dollars they earn today will have at least as much purchasing power (whether in cash or as face value of a bond) a year from now or twenty years from now. They do not wish to have to become speculators. If “it is a recognized characteristic of money as a store of wealth that it is barren,” this “recognition” is mistaken, in spite of the fact that so many economists have been guilty of it. As W. H. Hutt has pointed out, money “is as productive as all other assets, and productive in exactly the same sense.” “The demand for money assets is a demand for productive resources.” Failure to recognize this is the source of one of Keynes’s greatest fallacies.

Austroglide, I’ve noticed that as well. Indeed it seems Keen is following in the steps of Keynes…where his writing contains countless inconsistencies, is very vague, shifts definitions and manipulates words. I’d like to get some straight answers, rather than “oh you obviously don’t understand because you haven’t read this piece of work.”

112

You have yet to respond directly to my critique. You’ve merely reformulated your argument, and posted yet another paper for me to read.

Here’s the essence of it, and it’s based mainly upon A Marx for Post Keynesians. Your failure to directly engage this critique suggests that you are incapable of refuting it.

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(Quoted from above:)

"Capitalists, it is supposed [by Mr. Keen], purchase commodities at prices which reflect their exchange values, but in the process of production their use values are brought to bear, resulting in a final commodity of higher value than the combined factor costs. This is the hypothesized origin of surplus value and capitalist profits.

But Mr. Keen fails to provide a convincing explanation as to why this is a credible representation or accurate description of the production process. His singular accomplishment here is merely to assert the relationships among exchange value, use value, and market prices. Indeed, no explicit argument is ever formulated to prove this proposition. Instead, Mr. Keen, following Mr. Marx, implicitly and silently grants its truth based upon the mere fact of capitalist profits.

And here’s a bit of completely non-shocking news:

The attempt to achieve an acceptable reconciliation has been a major, if not the major, intellectual focus of Marxian economics. See Desai 1988 for a recent survey; for a recent attempt to “solve” the transformation problem, see Mohun 1994. (Keen, p. 5).

In other words, no Marxist can provide a convincing account of surplus value.

In other words, Mr. Keen’s argument is fatally flawed.

…

The problem with Mr. Keen’s analysis is that it builds upon the Marxian constructs of exchange-value and use-value - and therefore conceptually is burdened with the impossible task of logically developing an irrefutable connection between exchange-value and use-value on the one hand, and how these cause market prices and capitalist profits on the other. Mr. Keen fails in this, and indeed apparently so too have generations of Marxists. Ultimately, then, Mr. Keen is unable to provide a reasonable account for capitalist profit."

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113

Austroglide, that won’t be good enough. You’d better read everything ever written by every civilization in every language. You never know what tricky sources that Mr. Steve Keen will resort to next!

114

Oh also, Mash, as far as “Either inflation has to be induced to allow for easing of debt servicing or the debt deflation cycle has to be ridden out,” no, the natural adjustment of wage rates (notice, not wage’S’), can “save the economy from this situation.”

Stop thinking only in aggregates: small, gradual, natural wage adjustments in specific industries, namely, the ones that experienced the most malinvestment, are the most effective way of letting this thing fix itself. A violent injection of inflation across the whole economy will not end well!

115

How does spending more than you have grow income?

116

In case you’ve forgotten Astroglide,

The reason I joined this discussion in the first place was that I had seen your “critique” of my paper on Say’s Law, in which you had written that “The interesting thing about Mr. Keen’s argument seems to me to be how it so quickly falls apart once it is revealed that it depends logically on Marx’s theory of profit, which in turn depends upon his labor theory of value”.

At no point in that paper did I even refer to the labour theory of value: you simply leapt to the conclusion that, because I had quoted Marx, my argument had to depend on his theory of value.

Not only did my argument not depend on the labour theory of value, I had earlier disproven the labour theory of value using Marx’s own logic. So the confusion in that instance was entirely your own–and it’s no wonder that I suggested you read a bit more widely before attempting critiques in future.

Secondly I tried to engage in a discussion on this topic based solely on the points raised in the discussion here. While others on this blog arguably tried to engage with those propositions–by asserting that M–C–M+ simply collapses in to C–M–C and so on–you asked for clarification of my views about Schumpeter: " I will do my best to respond to your post, however this will take time. For now, here’s my reply to your specific characterization of Joseph Schumpeter as being an Austrian school economist."

I then replied on that side issue that you asked for clarification on, and for a while it looked like a useful discussion on the development of economic thought in general and Austrian in particular was occurring: “Thanks. This is interesting, and stands in direct opposition to Rothbard’s view on Schumpeter from above…”

You then cited another Austrian authority on whether Schumpeter was an Austrian: “Upon further investigation, it appears that Mr. Schumpeter clearly and unequivocably was NOT an Austrian economist.”

Then you threw in a couple of questions back on the Say’s Law issue (“Mr. Keen, please define what you mean by these terms. 1) 100% Say’s Law; 2) 99% Say’s Law”; “I don’t follow this distinction, specifically the “permanent” aspect. What is meant by “permanent”?”), and I attempted to complete our discussion on Schumpeter before turning to these clarifications. In response to that comment, you wrote:

"Mr. Keen,

Above you argue that Mr. Schumpeter WAS an Austrian. Now you equivocate and claim that Schumpeter was merely a descendant.

You are already changing the facts of your argument and we’ve only just begun. For this reason and others, I can see that this conversation is going nowhere fast. Therefore I’m finished. Best of luck to you."

So I thought you had terminated the conversation, and since I was finding discussion on this list somewhat less than enlightening, I wasn’t particularly upset to have it terminated.

I ignored some of your subsequent comments simply because I have many better things to do with my time. As for example this one:

Indeed. It is impossible to hold a conversation with someone whose definitions are subject to abrupt change, and also with someone who insists upon thrusting before you a constant stream of new arguments for you to analyse in a process of infinite regress (“No, no…to understand what I REALLY meant, you should read THIS”), where the subject of conversation is constantly changing and therefore always beyond one’s grasp. Exasperating and a ridiculous waste of time.

You and liberty student then got involved in a little critique of me that I characterise as the Gerald Ford defence: “I can’t do two things at once, like walk and chew gum”. You asked for clarification on my side remark on Schumpeter Astroglide, and I was simply replying to your queries. Then you suddenly decide that I am throwing in “a constant stream of new arguments for you to analyse in a process of infinite regress”.

I was content to leave mash to make what I thought were excellent points here rather than spending my time doing so until I replied to Jon Bostick and zefreak’s comment that appeared to open the way for an empirical argument, one I had intended to get on to prior to your decision to end the discussion. But as I now have very little respect for the intellectual depth of this site, I wasn’t about to waste my time setting out the argument in great detail for you whenI had already done it for an academic audience elsewhere.

And yes, I am insisting that you read a lot more widely than you have to date. I readily concede that you have read more Austrian authors than I have; but I have read far more broadly in economics, which is why I find it fairly easy to consider Schumpeter (another critic of Say’s Law) while outlining Marx’s and my own critique. It’s also why I don’t hold Austrian economics in general in high regard, because many concepts in it have been soundly critiqued by authors from other schools (such as Sraffa) on issues that Austrians treat as far simpler than they are.

I sincerely hope that you are a young man, because to have so little breadth to your reading if you are near my age would indeed be tragic.

117

How do you know their oh so “sound” “critiques” have gone without answer or have any merit, at all, especially if you’ve not engaged much with Austrian economic literature, especially in the case of Sraffa? So far it is you whom I do not hold in very high regard…

118

You’re right Steve, Austroglide was wrong to accuse you of throwing in “a constant stream of new arguments for you to analyse in a process of infinite regress,” for you’ve failed to produce anything at all. I really hope when you write your critique you attempt to actually challenge the Austrian propositions head-on rather than dance around them with oblique terminology, obscure arguments and a misunderstanding of the very thing you’re critiquing as Keynes loved to do. And no, ex cathedra pronouncements just won’t cut it.

119

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Well, now we finally discuss something substantive. Two points:

  1. To be fair, it is not wholly accurate to state that you simply “quoted Marx”, as if you merely mention him here and there in your critique of Say’s Law in “Nudge Nudge, Wink Wink”. No, the Marxian C-M-C’ and M-C-M’ conceptions are the very centerpiece of your analysis, and indeed you quote heavily from Marx throughout your paper in order to make your case. What’s more, nowhere do you explicate your own value theory, or offer any suggestion that you disagree with Marx in any way. For these reasons, and since it is commonly understood (correctly or not) that Marx employs a labor theory of value, it is extremely reasonable for readers of “Nudge Nudge, Wink Wink” to draw the conclusion that yours is a labor theory of value. To claim that readers ought to know better seems somewhat unreasonable. And to be astonished that readers don’t know better seems highly so.

  2. But this controversy readily disappears, since above it is quickly pointed out by poster mash that you, in fact, don’t subscribe to a labor theory of value. Indeed, in “Use value, exchange value and the demise of Marx’s Labor Theory of Value” and “A Marx for Post Keynesians”, it is clear that you subscribe to a cost of production theory of value.

Therefore, upon reading these works, I immediately amended my critique of your analysis of capitalist profits to accommodate my new understanding of your value theory. You have yet to address this critique.

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I’ve read parts of your presentation of Sraffa. Your disagreement with the Austrians regarding value theory appears based, at least in part, upon empirical work by economists including Galbraith. Following Sraffa, you readily conclude that Galbraith’s empirical work demonstrates that many prices are determined by costs of production, and capitalist profit arises from “markup”. It is true that previously I was unaware of Galbraith’s work, and am at present still unfamiliar with it. I am indeed curious whether his findings are valid, and if valid how Austrian economics could explain this.

At the same time, however, Sraffa’s argument supposes that economic science proceeds upon empirical findings. The Austrians, for very good reason, argue otherwise.

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“Considering” Schumpeter - that is, using his analysis to illustrate your point - is one thing. You, however, attempted to place him directly inside the Austrian school:

This is found on page 3 of this thread.

Goodness knows what you were planning to argue about Austrian economics were this mischaracterization of Schumpeter allowed to stand.

The important point here, however, is that these are your own words. You wrote them and posted them above. And yet now you fail to take responsibility for them. Now, instead of claiming Mr. Schumpter is actually an Austrian, you hedge and equivocate:

  1. On thread page 5, you demote Schumpeter from Austrian insider (indeed, from being “the ultimate Austrian”, as you say on page 3) to mere “descendant”, and do so in a way which subtly implies that this has been your position all along:
  1. On thread page 6, you further distance yourself by implying that your reference to Schumpeter on page 3 was made for illustrative purposes only. Again, the subtle implication is that no mention was ever made that Mr. Schumpeter was an Austrian economist:

I, for one, am alarmed by these things: On the one hand, through the Schumpeter example, you have proven yourself willing to argue upon rather obviously incorrect facts (as I’ve already discussed above, it takes no deep understanding whatever of Austrian economics to know that Mr. Schumpeter’s logical positivist methodology immediately and fully disqualifies him from being considered an Austrian). On the other hand, once confronted with the fact of your incorrect characterization, you pretend you never argued such a thing about Mr. Schumpeter.

It’s not clear to me which is the more condemning: The fact that you made such a careless blunder, or the fact that you wish to pretend you didn’t.

What is clear, however, is that you don’t know much about Austrian economics. And also that, moreover, you’re either intellectually careless, or intellectually dishonest. Where, in your self-described wide reading of economics, did you learn these particular tricks?

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What’s tragic is that when the dollar disintegrates to a hyperinflationary dust and the U.S. economy collapses as a result, Post Keynesians such as yourself will still be searching for the origin of so called surplus-value, and will still be crying for ever more government stimulus to increase so called aggregate demand. Lack of intellectual precision indeed comes at a very high cost.

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120

Mr. Keen. You have successfully evaded the clarification offered to you on Say’s Law.

That’s the real issue here. You’re critiquing based on critiques, without a fundamental understanding of the very thing you are criticizing.

Sort of like watching a movie based on a book, then publishing a book review.

In light of the correct explanation of Say’s Law being offered to you, perhaps you should re-examine your first premises. It seems to me that it would take an enormous coincidence to occur that you successfully critiqued Say’s Law, when you did not quite understand it correctly.