Author Archives: V. Ramanan

Kaldor’s Footnote And Kaldor On Sraffa

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The world is more Kaldorian than Keynesian. After the crisis, Keynes became popular again but his Cambridge descendent Nicholas Kaldor is hardly remembered by the economics community. Even his biographers have some memory loss of him.

😉

Anthony Thirlwall and John E. King are biographers of Nicholas Kaldor. Superb books.

There’s a chapter Talking About Kaldor: An Interview With John King in Anthony Thirlwall’s book Essays on Keynesian and Kaldorian Economics. There’s an interesting discussion on money endogeneity (Google Books link):

J.E.K.  … I wonder if Kaldor would have gone as far as Moore in arguing that the money supply curve is horizontal.

Anthony Thirlwall replies saying he would have argued that the supply of money is elastic with respect to demand, instead of quoting him. Here’s Nicholas Kaldor stating explicitly in a footnote in Keynesian Economics After Fifty Years, in the book, Keynes And The Modern World, ed. George David Norman Worswick and James Anthony Trevithick, Cambridge University Press, 1983, on page 36:

Diagrammatically, the difference in the presentation of the supply and demand for money, is that in the original version, (with M exogenous) the supply of money is represented by a vertical line, in the new version by a horizontal line, or a set of horizontal lines, representing different stances of monetary policy. 

[italics: mine]

Anthony Thirlwall is one of the commenter in the book chapter. The book is proceedings of a conference on Keynes.

But that’s not enough. Turn to page 363 of the book.

A.P.T.  He had a very high regard for Sraffa but he never wrote on this topic.

J.E.K.  Not something that would really have concerned him very much? Too abstract and too removed from reality?

A.P.T.  Probably, yes. It is quite interesting that Sraffa was his closest friend, both personal and intellectual, and they used to meet very regularly – almost every day when Sraffa was alive. But there’s no evidence that they ever discussed Production of Commodities by Means of Commodities.

J.E.K.  That’s amazing. There’s certainly no evidence that he ever wrote anything on those questions.

A.P.T. There’s no evidence that he wrote anything, or that indeed he really understood Sraffa. Well, he had the broad thrust, but I don’t know that he ever read it carefully, or understood the implications.

In Volume 9, of Kaldor’s Collected Works, there are two memoirs. One of Piero Sraffa and the other on John von Neumann.

Kaldor-On-Sraffa

Nicholas Kaldor on Piero Sraffa

Interestingly the editors and F. Targetti (another biographer) and A.P. Thirlwall!

I guess if you know a person so closely – like the biographers do, of Kaldor- you tend to forget a few things about them.

Nick ROKE, Thrift, And Hoarding

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The new issue of ROKE is out and celebrates 80 years of The General Theory. Nick Rowe has a new paper in the issue titled, Keynesian Parables Of Thrift And Hoarding. Requires access. Nick has a post on his blog where he welcomes comments.

Abstract:

I argue that Keynes missed seeing the importance of the distinction between saving in the form of money (‘hoarding’) and saving in all other forms (‘thrift’). It is excessive hoarding, not excessive thrift, that causes recessions and the failure of Say’s law. The same failure to distinguish hoarding from thrift continues from The General Theory into the IS–LM model and into New Keynesian macroeconomics. On this particular question, economists should follow Silvio Gesell rather than John Maynard Keynes. The rate of interest in New Keynesian models should be interpreted as a negative Gesellian tax (that is, a subsidy) on holding money issued by the central bank.

In my opinion, a part of it, the distinction between what’s called “hoarding” and “thrift” above is not something which Keynesians haven’t considered. In fact, in the sectoral balances approach, it is net lending and not saving whose behaviour is more highlighted.

A sector’s or an economic unit’s saving is defined as its disposable income less consumption expenditure.

S = YD − C

On the other hand, a sector’s net lending is defined as its disposable income less expenditure.

NL = YD − C − I

These things are not as straightforward as they look. Here’s an example. I can be both a saver and borrower. 

Let’s say, I start with no assets/liabilities, earn $1mn in a year, pay taxes of $200,000, have consumption expenditure of $100,000 and buy a house worth $5m by borrowing $4.3m from a bank.

My saving is $700,000 and my net lending is minus $4.3 million [ = ($1mn − $200,000) − $300,000 − $5m].

Of course, the fact that I am a net borrower doesn’t make me poor. My house is worth $5m and I have a liability of $4.3m which implies my net worth is $700,000.

However, my liquidity is low. If tomorrow the economy collapses and I lose my job, I will be in a bad situation. In short, negative net lending (or a negative financial balance) of an economic unit or a sector contributes to financial fragility.

There’s another important point: even though I am a saver, my saving rate is 7/8, I have contributed hugely to aggregate demand. This can happen at a sectoral level as well. So perhaps this is the reason why Nick Rowe makes this distinction.

So if we were to blindly believe in Keynes, we would have concluded wrongly by just looking at the saving rate. But it is a matter of emphasis: economists make ceteris paribus arguments and I do not think Keynes didn’t understand this. He was perhaps holding everything else constant and changing the propensity to consume to highlight an important fact. But in real life ceteris is never paribus. What Keynes was arguing was that saving is not necessarily a good thing at the macro level.

Back to sectoral balances. Since, a sector’s (such as the household sector’s) negative net lending (or negative financial balance) adds to its financial fragility, this process will reverse. Private expenditure relative to private disposable income will fall. But this has an effect of being a drain on aggregate demand. And this can cause a recession.

Nick Rowe would have argued that it is the demand for money which caused a recession. Till here, it’s the same as argued above, because private expenditure falling relative to income is due to economic units trying to increase their liquidity. (There’s a “paradox” here: all units trying to reduce their fragility causes more fragility!).

There is however a difference: a sector’s or economic units’ demand for “money” can also be independent to income/expenditure and is more related to asset allocation between various kinds of financial assets. But here it cannot be said to cause a fall in aggregate demand and output. So a higher demand for money per se cannot be said to cause a recession.

As I was finishing writing this, JKH put up a comment at Nick’s blog saying Keynes understood it. I reproduce the comment below.

JKH:

There’s no question that Keynes appreciated the distinction between thrift and hoarding:

GT Chapter 9

“The rise in the rate of interest might induce us to save more, if our incomes were unchanged. But if the higher rate of interest retards investment, our incomes will not, and cannot, be unchanged. They must necessarily fall, until the declining capacity to save has sufficiently offset the stimulus to save given by the higher rate of interest. The more virtuous we are, the more determinedly thrifty, the more obstinately orthodox in our national and personal finance, the more our incomes will have to fall when interest rises relatively to the marginal efficiency of capital. Obstinacy can bring only a penalty and no reward. For the result is inevitable.”

GT Chapter 13

“The concept of hoarding may be regarded as a first approximation to the concept of liquidity-preference. Indeed if we were to substitute ‘propensity to hoard’ for ‘hoarding’, it would come to substantially the same thing. But if we mean by ‘hoarding’ an actual increase in cash-holding, it is an incomplete idea — and seriously misleading if it causes us to think of ‘hoarding’ and ‘not-hoarding’ as simple alternatives. For the decision to hoard is not taken absolutely or without regard to the advantages offered for parting with liquidity; — it results from a balancing of advantages, and we have, therefore, to know what lies in the other scale. Moreover it is impossible for the actual amount of hoarding to change as a result of decisions on the part of the public, so long as we mean by ‘hoarding’ the actual holding of cash. For the amount of hoarding must be equal to the quantity of money (or — on some definitions — to the quantity of money minus what is required to satisfy the transactions-motive); and the quantity of money is not determined by the public. All that the propensity of the public towards hoarding can achieve is to determine the rate of interest at which the aggregate desire to hoard becomes equal to the available cash. The habit of overlooking the relation of the rate of interest to hoarding may be a part of the explanation why interest has been usually regarded as the reward of not-spending, whereas in fact it is the reward of not-hoarding.”

Being the supreme macro-accountant (the first one really), he would be totally in tune with the general stock/flow consistency theme of the post-Keynesians.

Hoarding is a stock/asset allocation of liquidity, interconnected with the determination of the interest rate, as he notes above. He correctly rejected the idea of the interest rate as being determined by an “equilibrium” of saving and investment. He maintained correctly that those two measures are continuously equivalent.

Recession dynamics are a flow phenomenon as he describes it, using reconciliation of income accounting at two different points in time.

The behavior of liquidity, hoarding, and the interest rate is stock behavior (including hoarding) within that saving flow dynamic (including thrift).

Kalecki And Keynes On Wages

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The blogger writing for Social Democracy For The 21st Century: A Post Keynesian Perspective has an interesting post about Keynes’ view on wages.

I have a few points to add, which may not be contradictory to that post. It’s possible Keynes’ understanding changed from his discussions with Kalecki. In fact, Jan Toporowski, biographer of Michael Kalecki sees Kalecki’s position as far superior compared to that of Keynes. In an article titled Kalecki And Keynes On Wages, he says:

Both Kalecki and Keynes realised that their macroeconomic analysis depended critically on the inability of the labour market to be brought into equilibrium by changes in wages, as postulated by neoclassical theory. In 1939 therefore they wrote their explanation for this inability of free markets in capitalism to attain the equilibrium imagined by Robbins, in which all resources, including labour, are fully utilised. Keynes however got stuck on the effects of wages on the short-period equilibrium in an abstract Marshallian model. Kalecki was able to demonstrate more clearly the complex real income effects of wage changes.

…

Kalecki’s approach to the subject was much clearer, and free of Marshallian dilemmas applied to historical data.

Jan Toporowski

Jan Toporowski, Levy Institute, May 2011

In the article, Toporowski points out the debate between Keynes and John T. Dunlop, Lorie Tarshis and Michal Kalecki. He also quotes Keynes from the GT:

in the short period, falling money wages and rising real wages are each, for independent reasons, likely to accompany decreasing employment; labour being readier to accept wage-cuts when employment is falling off, yet real wages inevitably rising in the same circumstances on account of the increasing marginal return to a given capital equipment when output is diminished.

Keynes was not fully correct on this but it is interesting to note that he was almost there. Perhaps his own quote explains: he himself couldn’t escape from old ideas which ramify into every corner of our minds.

In his book Post-Keynesian Economics: New Foundations, pp 277-278, Marc Lavoie says:

Indeed, in several versions of post-Keynesian short-run model of employment, higher real wages are conducive to higher levels of employment.

In their biography, Michal Kalecki (Great Thinkers In Economics), Julio López G and Michaël Assous point out that it was Michal Kalecki who first figured this out before Dunlop-Tarshis-Kalecki (1939) in his 1938 paper The determinants of distribution of the national income, also published in Collected works of Michal Kalecki, Vol. I, edited by J. Osiatynsky, Oxford University Press, 1990.

 

Collected Works Of Michal Kalecki - Volume 1

 

So here’s Kalecki. It’s great and humble of him to call it the “Keynesian theory”, although he found something contrary to Keynes’ own point. But that’s the thing about Keynes – he said a lot of things which is contrary to his own revolutionary thoughts. Heterodox economists see it in a nicer way. Joan Robinson would have said, “Keynes should not have said that”. Keynes’ opponents would pounce on his several vulnerabilities. And then there’s the bastardization of Keynes’ work. Most of economics before the crisis simply states: “Keynes is wrong”.  Over to Kalecki:

Final remarks

1. There are certain ‘workers’ friends’ who try to persuade the working class to abandon the fight for wages in its own interest, of course. The usual argument used for this purpose is that the increase of wages causes unemployment, and is thus detrimental to the working class as a whole.

The Keynesian theory undermines the foundation of this argument. Our investigation above has shown that a wage increase may change employment in either direction, but that this change is unlikely to be important. A wage increase, however, affects to a certain extent the distribution of income: it tends to reduce the degree of monopoly and thus to raise real wages. On the other hand, ‘real’ capitalist incomes tend to fall off because of the relative shift of income from rentiers to corporations, which lowers capitalist propensity to consume.

If viewed from this standpoint, strikes must have the full sympathy of ‘workers’ friends’. For a rise in wages tends to reduce the degree of monopoly, and thus to bring our imperfect system nearer to the ideal or free competition. On the other hand, it tends to increase the thriftiness of capitalists by causing a relative shift of income from rentiers to corporations. And ‘workers’ friends’ are usually admirers both of free competition and or thrift as a virtue of the capitalist class.

2. Another question may arise in connection with the Keynesian theory of wages. Is not the struggle of workers for higher wages idle if they lose whatever gain they may make in the form of a higher cost of living? We have shown that wage reduction causes a change in the distribution of the national income to the disadvantage of workers, and that in the event of an increase in wages the reverse occurs. This is not to deny, however, that changes in real wages are much smaller than those in money wages; but never the less they may be quite material, especially as we are dealing with averages which reflect only slightly great fluctuations in real wages in particular industries.

We noticed above the great stability of the relative share of manual labour in the national income. This is not in contradiction with the influence of money wages upon the distribution of the national income. On the contrary, the resistance to wage cuts prevents the degree of monopoly from rising in the slump to the extent it would if ‘free competition’ prevailed on the labour market. Although, in fact, the relative share of manual labour is more or less stable, this would not obtain if wages were very elastic.

It is quite true that the fight for wages is not likely to bring about fundamental changes in the distribution of the national income. Income and capital taxation are much more potent weapons to achieve this aim, for these taxes (as opposed to commodity taxes) do not affect prime costs, and thus do not tend to raise prices. But in order to redistribute income in this way, the government must have both the will and the power to carry it out, and this is unlikely in a capitalist system.

Link

The UN Global Policy Model

I came across the UN Global Policy Model document with lots of equations and written by Francis Cripps and Alex Izurieta. (h/t Jo Michell). The article date is May 2014.

Just thought I should link it for readers interested.

(The post title is the link).

Keynes’ ‘Human’ Apple

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The point needs emphasising because the art of thinking in terms of models is a difficult–largely because it is an unaccustomed–practice. The pseudo-analogy with the physical sciences leads directly counter to the habit of mind which is most important for an economist proper to acquire.

I also want to emphasise strongly the point about economics being a moral science. I mentioned before that it deals with introspection and with values. I might have added that it deals with motives, expectations, psychological uncertainties. One has to be constantly on guard against treating the material as constant and homogeneous in the same way that the material of the other sciences, in spite of its complexity, is constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worth while falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the centre of the earth.

But do not be reluctant to soil your hands, as you call it. I think it is most important. The specialist in the manufacture of models will not be successful unless he is constantly correcting his judgment by intimate and messy acquaintance with the facts to which his model has to be applied.

– J. M. Keynes to Harrod, 16 July 1938

Monetary Mysticism

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Normally, I’d give such things a pass. But there are monetary mysticists – the Neochartalists (“MMTers”) – who make a big issue of a few monetary things. In a post on banking, Eric Tymoigne such mystical things:

Throughout this blog I will not the use the words “loan” “lender” “borrower” “lending” “borrowing” when analyzing banks (private or Fed) and their operations. Banks don’t lend money, and customer don’t borrow money from banks. Words like “advance” “creditor” “debtor” are more appropriate words to describe what goes on in banking operations.

The word “lend” (and so “borrow”) is really a misnomer that has the potential of confusing—and actually does confuse—people about what banks do.

So banks do not make loans?

But that’s not the main point in my post. It is the other claim:

  • Point 2: The Fed does not earn any money in USD

When the Fed receives a net income in USD it is not receiving any money/cash flow, i.e. its asset side is not going up. What goes up is net worth.

[highlighting: mine]

Such things are also closely related to claims by the Neochartalists that “taxes don’t fund government expenditure” or “taxes don’t fund anything”. The claim “the Fed does not earn any money in USD” is quite silly.

If you were to ever do an honest-to-goodness calculations with such things, you’ll notice that items accounts receivable and accounts payable are important things. In the simplest example, the Federal Reserve holds government bonds as assets and has bank reserves or settlement balances of banks and currency notes on liabilities. So the Fed is accruing interest on bonds it holds and has payables on interest on banks’ settlement balances. The system of national accounts 2008, has a nice explanation on para 7.115:

The accrual basis of recording

Interest is recorded on an accrual basis, that is, interest is recorded as accruing continuously over time to the creditor on the amount of principal outstanding. The interest accruing is the amount receivable by the creditor and payable by the debtor. It may differ not only from the amount of interest actually paid during a given period but also the amount due to be paid within the period.

So the Federal Reserve’s assets can indeed go up along with net worth because of interest income. It will reflect in accounts receivable in assets. When an actual interest payment is received, it is a transaction in the financial account of the system of national accounts. Then, accounts receivable falls and so do liabilities but net worth doesn’t change. More generally, the Fed may also make advances to banks as the banking system as a whole can lose reserves for paying interest. There is absolute no need for the kind of mysticism that Neochartalists do.

Proof Of Infinitude Of Primes Using The Irrationality Of π

So a new largest prime number has been found.  It is

274,207,281 −  1

Of course we know that there is an infinitude of primes, so the number above is just the largest known.

A standard proof is via contradiction. Assume there is a largest prime pn . Then it can be shown that the number p1p2p3 … pn + 1 is also a prime, contradicting our assumption that there is a largest prime.

Yesterday I found another proof from Wikipedia which is fascinating. There is a formula:

π/4 = 3/4 × 5/4  × 7/8 × 11/12 × 13/12 × 17/16 × 19/20 × 23/24 × 29/28 × 31/32 × …

The numerator is all primes (except 2), one after the other. The denominator is the nearest multiple of 4 of the numerator.

We know  π is irrational. If there are a finite number of primes, the right hand side is a rational number, which doesn’t makes sense since the left hand side is irrational. Hence the right hand side is an infinite product. Hence there is an infinitude of primes!

National Accounting As Atheism

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The title of this post isn’t supposed to be taken seriously. It’s just a playful poke on Eric Lonergan’s post mentioned below.

On his blog, Sample Of One, Eric Lonergan has a post tiled Accounting as religion: Buffett, Derrida, and MMT. The post ends with the following line:

… but money is not a liability of the state.

Eric’s post is arguing with the Neochartalists but my post here has nothing to do with Neochartalism. I always find it amusing when people go “money is not the liability of the state, even though it’s technically a liability” and so on. I am going to take a different track here and make an argument like James Tobin’s brilliant 1963 paper Commerical Banks As Creators Of “Money” . I explained Tobin’s brilliant analysis in a post James Tobin, Banking And The Widow’s Cruse.

For this, I will go to a scenario in an open economy:

  • £ is the local currency and $ is the foreign currency.
  • Suppose foreigners hold £1bn in currency notes among other claims on residents. Of course in real life nobody holds £1bn in cash notes but I can always make my case more realistic.
  • Suppose the exchange rate £/$ is falling and the foreign exchange market is nervous and runaway expectations are building up on the exchange rate.
  • This forces the “£-central bank” to intervene.
  • The central bank has less foreign reserves, i.e., $s and hence asks the government treasury to issue $-denominated debt equivalent £1bn. This is done to obtain proceeds to make a sale of $s in the fx markets, with the hope that it reverses the direction of expectations.
  • The central bank sells $s worth £1bn in the foreign exchange market.
  • Foreigners who held £1bn in currency notes are the counterparties.

So liabilities have been dollarized.

Now in this story, the net asset position of the £-nation hasn’t changed. The net international investment position is the same. Only the composition of liabilities. However people who claim that “currency is not really a liability” will agree that the government has a liability in $s. In their way of counting, there is an additional liability (after netting). But that doesn’t make sense. I just walked you through transactions of equal monetary exchanges. If you think

money is not a liability of the state.

do you not see a self-inconsistency here?

In other words, the potential for liability dollarization makes accounting items such as currency notes, reserve balances at the central bank etc. as a liability in a true sense.

Moral of the post: Always start with the open economy.

Kaldor And Oil

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…  a more fundamental proposition [is] that any large change in commodity prices – irrespective of whether it is in favour or against the primary producers – tends to have a dampening effect on industrial activity; it retards industrial growth in both cases, instead of retarding it in the one case and stimulating it in the other. There are, as I shall now show, two reasons for this. It is partly a consequence of the fact that whilst a fall in commodity prices tends to be an effective instrument in moving the terms of trade against the primary producers, a rise in commodity prices is not likely to be nearly as effective in moving the terms of trade in their favour. It is partly also a consequence of an asymmetry in the behavioural consequences as between a gain and a loss of real income, the result of which is that any sudden shift in the distribution of world income, caused by a change in the terms of trade, is likely to have an adverse effect on industrial demand (in real terms).

The important cause of the first asymmetry is that while commodity prices are demand-determined, industrial prices are cost-determined, and because of that the rise in commodity prices has a very powerful inflationary effect operating on the cost side. The rise in the price of basic materials and fuels is passed through the various stages of production into the final price with an exaggerated effect – it gets ” blown up ” on the way by a succession of percentage additions to prime costs which mean, in effect, an increase in cash margins at each stage. This causes (initially) a rise in the share of profits in the value added by manufacturing which in itself is a powerful factor (in countries where trade union power is strong) in causing pressure for wage increases. Added to this is the price-induced rise in wages caused by what Sir John Hicks called “Real Wage Resistance” – the reluctance of workers to accept a cut in their standard of living (which is not paralleled by similar reluctance to accept a rise). For these reasons a swing in the terms of trade in favour of the primary producers is not likely to last for long. The industrial sector with its superior market power, resists any compression of its real income by countering the rise in commodity prices through a cost-induced inflation of industrial prices.

Moreover – and here we come to the second reason mentioned above – the inflation itself has a deflationary effect on the effective demand for industrial goods in real terms, partly because the rise in the profits of producers in the primary sector is not matched by a rise in their expenditure – this was particularly marked on the present occasion through the vast accumulation of financial assets by the oil producers – and partly because the governments of most, if not all, of the industrial countries are likely to react to their domestic inflation by fiscal and monetary measures which reduce consumer demand and put a brake on industrial investment. Thus the rise in commodity prices may well result in a wage/price spiral-type of inflation in the industrial sectors which in turn causes industrial activity to be restricted. The latter tends to eliminate the shortages and thereby reverse the trend in commodity prices. A good example of this has been the U.S. inflation of I972-3, which was clearly cost induced but not wage-induced; it was caused by the rise in commodity prices (with wage rises trailing behind the rise in living costs) and which led to strongly restrictionist monetary policies in order to counter the inflation, which in turn brought about a considerable economic recession. (Somewhat later similar restrictionist policies were adopted by governments of other leading countries, such as Germany and Japan.)

If the above analysis is correct, the market mechanism is a highly inefficient regulator for securing continuing adjustment between the growth of availabilities and the growth in requirements for primary products in a manner conducive to the harmonious development of the world economy.

The emergence of commodity surpluses which should, in principle, lead to accelerated industrialisation may have a perverse effect by diminishing effective demand for industrial products. Similarly the emergence of shortages which should accelerate the growth of availabilities of primary products through improvements in the terms of trade may lead instead to an inflation of manufacturers’ prices which tends to offset the improvement in the terms of trade, and by its dampening effect on industrial activity, worsens the climate for new investment in both the primary sector and the industrial sector.

– Kaldor, Nicholas. 1976. “Inflation and Recession in the World Economy”. The Economic Journal 86 (344). [Royal Economic Society, Wiley]: 703–14. doi:10.2307/2231447. Link