http://www.pen0s.org/img/pain5.jpg

(http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#4255998)

Thanks Bush!

(http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#4256079)

*by some i mean a blowjob, but close enough

(http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#4256177)

http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#4255952

(http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#4256157)

http://www.xoxohth.com/wiki/index.php/Rasquach

(http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#4256214)

[i'm disappointed this took so long to come up, xo really is losing it)

(http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#4256254)

On the future of Keynesian economics: struggling to sustain a dimming light

James C.W. Ahiakpor

I

Introduction

JUDGING BY THE EVOLUTION OF KEYNESIAN ECONOMICS, we may conclude that its future will entail a significant struggle on the part of the adherents to sustain its dimming light. Keynesian economics took over macroeconomic analysis with lightening speed following the publication of Keynes's General Theory in 1936. Keynes himself intended his work to cause a revolution in economic thought, and took steps to make sure that the book got the most exposure possible. He publicized the fact that he was writing a revolutionary book and also subsidized its price to sell for only five shillings (the equivalent of $2 U.S.), instead of the 15 shillings several reviewers of the book expected it at least to cost (Backhouse 1999). Reviewed in at least 40 publications, from newspapers to literary and professional journals, in its first year of publication, the book's message that Keynes had discovered the cause and cures for persistent unemployment quickly reached a wide audience. By the 1960s, communicating Keynes's macroeconomics through formalized models--equations and diagrams--had become the standard fare in universities across the world, following especially the work of J. R. Hicks (1937), Franco Modigliani (1944), Paul Samuelson (1948), Alvin Hansen (1949, 1953), and Don Patinkin (1965).

The 1970s saw a significant erosion of the Keynesian dominance of macroeconomics following the experience of significant inflation and economic recession, particularly among the industrialized countries hitherto believed to be more suitable for the application of Keynesian aggregate demand management policies to both stabilize and ensure economic growth. The failure of such policies greatly aided the emergence of monetarism in the 1970s, while the new classical and supply-side economics further challenged the remnants of Keynesianism in the 1980s. Keynesian macroeconomics at the turn of the 21st century has lost most of its influence on public policy making, although it is now represented by three different strands in academia: (1) the neoclassical Keynesianism of the Hicks-Hansen-Samuelson lineage, (2) the post-Keynesianism of the Kahn-Robinson-Harcourt tradition, and (3) the new Keynesianism espoused by the younger generation of mainly American Keynesians.

The persistence of neoclassical Keynesianism seems to be due primarily to the ease with which its formalization of Keynes's arguments in mathematical models can be taught in the classroom (the IS-LM model and the income-expenditure diagrams), although the monetarists and new classical economists also employ the same models to criticize the Keynesian conclusions. (1) The equilibrating processes inherent in the neoclassical Keynesian models and their apparent lack of emphasis on income inequality and the need to pursue redistributive policies as a means of promoting economic growth seem to have been the principal reasons for the development of post-Keynesianism (Davidson 1991). (2) On the other hand, the new Keynesians seek to provide microfoundations for Keynes's conclusions in response to criticisms of the neoclassical Keynesian models (Mankiw 1993, 1997). (3) Some Keynesians now appear to accept the importance of savings for economic growth as well as the role of excessive money creation in causing inflation in conditions of unemployment, thereby continuing to suggest the relevance of Keynesian economics (e.g., Mankiw 1997; Frank and Bernanke 2002; DeLong 2002). These are significant deviations from Keynes's own views, which regard savings as a negative force in the growth process and inflation as arising from excessive aggregate demand in a situation of full employment, as I explain below. Meanwhile, published research since the early 1990s has further exposed several of the fundamental errors upon which the Keynesian revolution was founded. What is most doubtful is whether Keynesianism in any of its forms can survive the exposure of such fundamental errors.

II

The Founding Pillars of Keynesian Economics

KEYNES FOUNDED HIS NEW ECONOMICS ON FIVE PRINCIPAL PILLARS, all of which are faulty:

(1) Saving is nonspending, and does not provide the funds for investment spending as the classical economists had explained;

(2) Consumption spending sustains and drives economic expansion through a multiplier process;

(3) The rate of interest is determined by the supply and demand for money (cash) or liquidity, not by the supply and demand for "capital" or savings;

(4) There are no equilibrating tendencies in a monetary economy to restore it to full employment once involuntary unemployment emerges; and

(5) The classical theories of interest, the price level, inflation, and the law of markets (or Say's law) are all founded on the premise that full employment always exists.

Keynes successfully persuaded most of his audience, including many economists, of the above claims about classical economics mainly by changing the meaning of some key economic terms (Ahiakpor 1998: ch. 2), although none of his claims is valid. Neither does a monetary economy work the way Keynes claims, nor are the classical principles founded on the assumption of full employment. Of course, as noted in the Introduction, not all Keynesians now accept all of Keynes's claims.

Saving

Keynes defined saving as the nonspending of one's income on consumption, rather than spending on interest-or profit-earning assets, as the classics defined it. Keynes's new definition thus turns saving essentially into the hoarding of cash. Now, hoarded cash withdraws the purchasing power of income from circulation. If saving meant hoarding, there would be some currently produced goods and services for which there would be inadequate purchasing power to sustain their prices above cost. Producers must lose profits, be discouraged, and reduce their rate of production and therefore lay off some workers. As Keynes argues, saving in the form of hoarding does not only reduce the demand for currently produced goods and services, it also denies investors the funds they need to purchase materials for production as well as hiring workers (1936: 210). This is why increased saving has only a negative effect on an economy at less than full employment.

Keynes's new definition of saving as the hoarding of cash has been incorporated into macroeconomic models. His paradox of thrift argument (Keynes [1936] 1976: 30-31) appears convincing when illustrated as an upward shift of a saving function against an investment function, thus producing a fall in equilibrium national income. The IS-LM model achieves the same result by a leftward shift of the IS curve against a fixed LM curve. But when saving is defined according to the classics and Alfred Marshall (which is also consistent with what people do when they save), namely, as the purchase of interest-or dividend-earning assets, Keynes's negative conclusions about savings are shown to be false (Ahiakpor 1995). That is, S = Y(1 - t) - C - [DELTA] [H.sub.h] = [DELTA][FA.sup.d], where S = saving, Y(I - t) = disposable income, C = consumption, [DELTA][H.sub.h] = household's accumulation of cash balances from current income, (4) and [DELTA][FA.sup.d] = the purchase of newly supplied financial assets (demand deposits, savings and time deposits, money market mutual fund shares, money market deposit accounts, bonds, and stocks).

Thus correctly understood, savings provide the funds for lending by financial institutions, which hold a portion as reserves against future withdrawals as well as for satisfying legal reserve requirements (D - R = BC, where D = deposits, R = reserves, and BC = bank credit or loans and investments). Savings also are the source of funds for purchasing other financial assets, including stocks and bonds. But in Keynes's distorted view: "The investment market can become congested through the shortage of cash. It can never become congested through the shortage of saving. This is the most fundamental of my conclusions within this field" (1937b: 669). (5)

Consumption Spending

The Keynesian focus on consumption spending as the sustaining and driving force of an economy gives the appearance of validity for several reasons. One is that expected demand is the reason firms engage in production. Moreover, purchases for consumption constitute by far the largest single component of total spending in an economy; as Adam Smith observes: "Consumption is the sole end and purpose of all production" ([1776] 1976, 2: 179). Thus, the greater the level of consumption demand, the greater also will be the total demand for goods and services in the marketplace, validating producers' plans. Were the market demand to exceed producers' expectations, increased profits would be made as prices rise, encouraging increased production and subsequent hiring of more workers in the affected industries.

Richard Kahn (1931) turned the apparently positive relation between purchases for consumption and income generation for producers into a multiplier analysis, which Keynes ([1936] 1976) subsequently adopted. The analysis has become a staple of modern macroeconomics. The argument, simply put, is that an individual's consumption spending ([C.sub.o]) becomes another's (seller's) income ([C.sub.o] = [Y.sub.1])- The seller also consumes a fraction ([beta]) of that income ([C.sub.1] [beta][Y.sub.1]), which then becomes another's income ([C.sub.i] = [beta][Y.sub.1]= [Y.sub.2]). Subsequent consumption spending out of [Y.sub.2] generates further income ([C.sub.2] = [beta][Y.sub.2] = [[beta].sup.2][Y.sub.1] = [Y.sub.3]), and so on, until the initial consumption spending has generated a geometric series whose summation equals k[C.sub.o], where k = 1/(1 - [beta]) is the multiplier. Clearly, the larger is the fraction consumed out of income, the larger will be the size of the multiplier: if [beta] =.8, k= 5, and if [beta]=.9, k = 10.

The multiplier analysis is fundamental to modern Keynesian analysis, including the income-expenditure model in which the slope of the expenditure curve reflects the size of [beta] (the marginal propensity to consume). Given some value for [beta], Keynesian analysis suggests that changes in business investment (I) and government expenditures (G) are multiplied by the factor k to determine changes in equilibrium national income: [DELTA]Y = k[DELTA]I or [DELTA]Y = k[DELTA]G. The same results are obtained in the IS-LM model.

But as has been shown (Ahiakpor 2001), the Keynesian multiplier argument is incorrect. Without having produced or sold anything, the initial consumer in the multiplier model would have no means by which to make the purchase. (If spending is from a gift, the donor must first have earned income from production.) Furthermore, to have sold anything to acquire the purchasing power, the buyer of the product also must have earned income with which to make the initial purchase. Clearly, then, it is production that makes consumer spending possible, as J.-B. Say clarifies in the law of markets: "productions can only be purchased by productions" (1821: 15; emphasis in original). (6) Furthermore, the part of income not directly consumed is not lost from the expenditure stream as the Keynesian multiplier argument presumes. Savings are borrowed to purchase goods and services for consumption or for production by issuers of loan notes or by the sellers of financial assets. Thus, if there is an expansionary force or multiplier process going on, it starts with production, not from consumption spending.

The Keynesian derivation of an expansionary effect from government spending through the multiplier process also depends on the false assumption that government spending does not depend on current income or savings and thus can be autonomous, even for a closed economy. But government spending must be financed either by tax revenues or by the sale of debt instruments (bonds). Unless the bonds are sold to a central bank or to foreigners, the public must pay for them out of their savings, which depends on their income {[DELTA]F[A.sup.d.sub.G] = [lambda]Y = [DELTA]F[A.sup.s.sub.G] = (G - T)}, just as the public supplies loanable funds to private investors by purchasing their debt instruments ([DELTA]F[A.sup.d.sub.p] = [lambda]Y = [DELTA]F[A.sup.s.sub.p] = I). Therefore, the usual process of generating the government or investment expenditure multiplier is invalid. Y = AD = C + I + G becomes Y = [beta]Y + [lambda]Y + [gamma]Y, taking into account the fact that there cannot be any autonomous consumption spending in a closed economy. Whatever anyone spends first must have been earned from production. Thus, the simple Keynesian multiplier analysis yields a zero outcome: Y = [1/(1 - [beta] - [lambda] - [gamma]] x 0 = 0.

Theory of Interest

Keynes's supply and demand for money (liquidity) theory of interest seems plausible to its adherents partly because it uses language readily understood by most people: interest is paid for borrowing money. Thus the more money made available to borrowers, the cheaper must be the cost to borrow it. It also sounds reasonable to argue that a lender parts with money and may hold a loan note that renders the lender illiquid for the duration of the loan. This is why claiming that "the rate of interest is the reward for parting with liquidity for a specified period" (Keynes [1936] 1976: 167) appears to be a reasonable alternative theory of interest.

But the Keynesian explanation of interest-rate determination from the supply and demand for money or liquidity derives from a misunderstanding, arising from an "ambiguity of language" (Smith [1776] 1976, 1: 306-07). The lender who parts with money must first have acquired it with income. Thus it is the lender's nonconsumed income, or savings, that is loaned out. The money (cash) is merely an instrument of conveyance (Smith [1776] 1976, 1: 374; Pigou 1927: 121). Furthermore, the lender regards the loan note as part of his or her wealth, indeed as a financial asset. Also, in the businessperson's language, it is "capital" that is obtained in a loan. It is to recognize this fundamental process of borrowing and lending "capital" through the medium of money that the classical economists explained the theory of interest in terms of the supply and demand for "capital" or savings (e.g., Smith [1776] 1976, 1: 372-76; Ricardo 1951-1952, 1: 363-64, 2: 331, 3: 89-92; Mill 1965, 3: 647-55).

It was mainly Keynes's failure to interpret "capital" as found in the classical theory of interest in Marshall's Principles that led to his rejection of the theory and his offering the liquidity-preference alternative (Keynes [1936] 1976: 186-87; Ahiakpor 1990). The subsequent acceptance of Keynes's criticism of the classical theory also was influenced by Irving Fisher's warning that "the student should ... forget all former notions concerning the so-called supply and demand of capital as the causes of interest" (1930: 32), while explaining the Austrian alternative theory of interest in terms of time preference or the degree of impatience. Fisher himself had been misled by Bohm-Bawerk's (1890) criticism of the classical theory of interest, which was founded on his misinterpretation of "capital" as capital goods in the classical theory (Ahiakpor 1997b).

Adjustment to Full Employment

Keynes relied heavily on the experience of persistent unemployment during the Great Depression (1930-1933) and the slow recovery afterward in many economies around the world to make his claim that an economy may be stuck in a less than full-employment equilibrium unless the government acts to promote increased demand for goods and services. Part of his theoretical argument for this claim was that an unemployed worker does not have the ability to determine his or her nominal or real wage rate. Clearly, it is difficult for an individual to find employment by offering to work for less than the going rate in a firm. Keynes compounded the alleged problem of wage rate determination and unemployment by suggesting that it must take an authoritarian government to lower money wage rates across the board to solve the unemployment problem, since workers typically are resistant to nominal wage reductions. He also claimed that a reduction in wage rates would not reduce the rate of unemployment but would rather increase it since a lower wage rate would reduce aggregate demand, the price level, and the demand for labor in turn. Keynes's claims have been formalized into a model of aggregate supply and demand for labor in which the supply curve is horizontal at the existing wage rate until full employment, when the curve either slopes upward or becomes vertical. But, carefully considered, Keynes's argument is invalid.

Indeed, applying the classical theory of value to wage rate determination in different labor markets, we can derive the conclusion that in a flexible wage regime with an upward sloping supply curve, a fall in the demand for labor, say from the introduction of labor-replacing machinery or a fall in the general price level resulting from an excess demand for currency, must first produce some involuntary unemployment before the nominal wage rate falls. Even following the fall in the wage rate, the new equilibrium level of employment would likely be lower than that prevailing before the decrease in the demand for labor. In time, the demand for labor may increase as the rate of production, including the labor-replacing machinery, increases. On the other hand, an increase in the supply of labor following the fall in the price level would lower the nominal wage rate, thereby increasing the quantity employed.

But no "classical" economist, including Pigou in the Theory of Unemployment (1933), held up by Keynes as representative of the classical view of the labor market, claimed that the level of employment is always at full employment or that a fall in the demand for labor would not cause involuntary unemployment. (7) Furthermore, the notion of a perfectly elastic labor supply curve at an existing wage rate may be a meaningful depiction of a firm's or a subset of an industry's circumstances--"different employment centres," as Pigou (1933: 63) characterizes them. Thus an apple orchard or a machine tool company may be able to increase its hiring of workers without an increase in the nominal wage rate because it draws from other industries paying lower wages. But a horizontal labor supply curve for a whole industry or the economy defies sound logic.

It is also true that unemployed individuals may have great difficulty bargaining their way into employment with lower wage rates in the face of wage contracts. Rather, the existence of unemployed labor may slow down the rate at which the existing nominal wage rate increases in the future. Were the modern economy to be characterized by daily wage contracting, it may be possible for wage rates to adjust quickly for the rate of involuntary unemployment to approach zero. Indeed, in the face of uncertainty about demand in the goods market, there is no guarantee that all prospective employees would always be hired, a point Pigou (1933: 10, 222, 252) makes in his explanation of unemployment.

Keynes also makes an invalid argument, claiming that a fall in the nominal wage rate may not decrease the real wage rate but would rather increase the rate of unemployment. This because, according to his reasoning, total consumption spending would be reduced when the wage rate falls, and this would also cause the price level to fall and the real wage rate to rise ([1936] 1976: 262-69). First, the price level is determined by the supply and demand for money (currency), not by the demand for consumer spending by wage earners. Second, consumption spending out of wages is not the only determinant of the demand for goods and services in the aggregate. Some consumers borrow funds from savers for consumption purposes. Moreover, profit earners also are consumers, as are rental- and interest-income earners. Besides, the demand for nonconsumption goods also indirectly constitutes the demand for labor. (8) Furthermore, a fall in the nominal wage rate, by reducing the cost of production, increases the rate of profit at the current rate of production, encouraging producers to hire more workers. Thus, Keynes's ([1936] 1976: 261) requirement that the "community's marginal propensity to consume [be] equal to unity" in order for a cut in the wage rate not to decrease total employment is just a red herring. So are his claims that the type of wage cuts that may be helpful to an economy "could only be accomplished by administrative decree [which] is scarcely practical politics under a system of free wage-bargaining" ([1936] 1976: 265) or be achieved in "a highly authoritarian society" ([1936] 1976: 269). Labor unions in nonauthoritarian societies are known to negotiate wage cuts in order to minimize layoffs among their members in times of economic recession.

Keynes is also incorrect in claiming that a cut in the nominal wage rate may keep prospective employers waiting for more cuts before hiring additional employees ([1936] 1976: 263). The foregone production entails a cost to producers, namely, the revenue to meet the cost of borrowed "capital." The threat of bankruptcy keeps producers operating for as long as they can cover their director variable costs in the short run, that is, while there are contractual obligations to hire some factors of production. Keynes's argument may have provided an excuse for the behavior of British labor unions, which were resisting wage cuts in the face of increasing unemployment in the early 1930s, but it is not a correct depiction of the operation of a labor market free of recalcitrant labor unions.

Full Employment Always

Finally, Keynes attracted adherence to his theories of interest, the price level and inflation, and aggregate demand management by claiming that the classical alternatives he sought to replace were valid only under the condition of full employment. Thus he dubbed David Ricardo's (1951-1952, 1: 363-44) explanation that increases in the quantity of money by a central bank would not permanently lower interest rates but would only lower the value of the currency issued as being founded on the assumption of full employment (Keynes [1936] 1976: 191). Such a claim enabled him to canvass the view that a central bank could drive the rate of interest to zero or hold it down permanently to relieve society of the need for paying positive rates of interest to attract savings. Similarly, Keynes ([1936] 1976: ch. 21) could argue against the inflationary consequences of a central bank's excessive money (currency) creation by suggesting that, in conditions of "widespread unemployment," the increased money supply would primarily increase the rate of production and the hiring of labor rather than be a source of inflation. Also, by claiming that Say's law of markets assumed full employment and did not recognize the demand for money other than for transactions purposes (Keynes [1936] 1976: 18-20, 26), Keynes could then argue that in conditions of less than full employment there is need for activist government spending to increase aggregate demand. But all of these claims were founded on Keynes's misunderstandings or outright misrepresentations of classical arguments (Ahiakpor 1997a).

Ricardo's explanation that increases in the quantity of money (currency) do not permanently lower the rate of interest was based simply on the fact that money is not "capital" but only a means whereby "capital" may be transferred from savers to borrowers. It is by increasing the supply of credit ([S.sub.CR] = [S.sub.c] + [DELTA]H, where CR = credit, [S.sub.c] = supply of "capital" or savings, and [DELTA]H = increased quantity of currency or high-powered money) that the rate of interest is lowered in the short run, as Ricardo pointed out. But as prices rise, the demand for loans increases, driving interest rates back up. Real-world economies confirm the classical argument, especially in those countries where interest rates are free to adjust to the conditions of market demand and supply of credit. See Friedman (1972) for some examples relating to the 1960s and 1970s, where high currency (central bank credit) growth is associated with high rates of inflation and high interest rates. The experience of high currency growth and high rates of inflation and interest rates in Argentina, Brazil, and Peru in the late 1980s and early 1990s also confirms the argument (see the International Monetary Fund 2001). (9)

Keynes's denial that the supply and demand for money (currency) determine the price level rather than the rate of interest stems from his difficulties with the classical quantity theory of money as well as his misunderstanding of the classical forced-saving doctrine. From the Cambridge version of the quantity theory (H = kPy), we derive the price level as P = H/ky, where k = the proportion of income the public wants to hold as currency, y = real income or output, and H = currency. Clearly, changes in H, k, and y must affect P, the price level. Also from Fisher's version (HV = PT), which Fisher (1922: 26n) attributes first to Ricardo's formulation of the quantity theory, we derive the price level as P = HV/T, where V = velocity of money's circulation and T = the volume of transactions requiring the use of currency. Again, there is little doubt that changes in the quantity of money, money's velocity, or the volume of transactions requiring the use of cash must affect the price level. And none of such effects on the price level requires the assumption of full employment. If that assumption were required, we would observe changes in the price level of inflation only in economies with no unemployment. Reality defies the Keynesian view.

Say's law is basically an explanation of how prices and interest rates adjust to changes in excess demands or supplies in different markets in an economy. Prices rise in markets experiencing excess demands, while they fall in those with excess supplies. The self-interested behavior of producers leads them to adjust their supplies to meet market demand by reallocating productive resources. Interest rates also may rise from the excess demand for credit or "capital" while the adjustments are taking place in the product markets.

Were an excess demand to develop for currency (Marshall 1923: 42-46), especially in a condition of shaken confidence in the economy, the prices of all goods and services would fall, raising the value of money in response to its excess demand. It would require a sufficient increase in the quantity of money to meet its excess demand for the prices of goods and services to be restored to their original levels. J. S. Mill well explains the case of a shaken confidence thus:

such times there is really an excess of all commodities above the

money demand: in other words, there is an under-supply of money.

From the sudden annihilation of a great mass of credit, every one

dislikes to part with ready money, and many are anxious to procure

it at any sacrifice. Almost everybody therefore is a seller, and

there are scarcely any buyers: so that there may really be, though

only while the crisis lasts, an extreme depression of general

prices, from what may be indiscriminately called a glut of

commodities or a dearth of money. But it is a great error to

suppose, with Sismondi, that a commercial crisis is the effect of a

general excess of production.... its immediate cause is a

contraction of credit, and the remedy is, not a diminution of

supply, but the restoration of confidence. (Mili 1965, 3: 574)

Keynes's version of Say's law as "supply creates its own demand," or that the supply price of commodities is always equal to their demand price, arises from his misunderstanding of what the classics actually wrote (see Ahiakpor 1997a, 2001, 2003a; Jonsson 1995, 1997; Kates 1997, 1998). It is the failure of many modern interpreters to carefully address Keynes's misrepresentations of classical writings that his distorted version of Say's law has so much been popularized (e.g., Samuelson and Nordhaus 1998; Jansen, Delorme, and Ekelund 1994; Ekelund and Tollison 2000; Schiller 2000; and Davidson 1991).

III

Keynesianism in the Future

IN THE FACE OF THE DECLINING INFLUENCE of neoclassical Keynesianism, the post-Keynesians and new Keynesians have been attempting to sustain the relevance of Keynesianism. The post-Keynesians focus on issues of income distribution and economic problems, including inflation and recessions, as arising from the maldistribution of income between profits and wages or the misguided exercise of economic power by the capitalist class over labor, is a kind of Marxism without Marx. (10) They find relevance for their work in Keynes's concerns over the distribution of income in the General Theory, including his argument that increased taxation of the rich to finance public spending to favor the poor would ensure enough aggregate demand to sustain full employment or prevent recessions ([1936] 1976: 321, 372-75). However, the post-Keynesian theories of inflation, interest rates, and market prices provide little consistency with experience to command the serious attention of economists. When they come to recognize the fundamental flaws in the conceptions upon which Keynes based his income distributional arguments, particularly the fact that (1) saving is not hoarding but spending on financial assets, (2) interest rates are determined mainly by the flow of savings relative to its demand, and not by the rate of a central bank's money (currency) creation, (3) taxation does not change total spending of "aggregate demand" but only redistributes it, and (4) the price level and its changes are determined by the supply of money (currency) relative to its demand rather than the relation between wages and profits, they may be willing to give up their allegiance to their doctrine.

Some among the post-Keynesians also like to emphasize the effect of changing expectations about future profitability of investment in determining current rates of investment, employment, and growth, following Keynes's arguments in the General Theory and his claim that "orthodox theory assumes that we have a knowledge of the future of a kind quite different from that which we actually possess'(1937a: 222). Hyman Minsky combines the problem of uncertainty with the nature of the financial system in advanced capitalist economies to build his so-called financial instability hypothesis. But the "classical" economists did recognize the problem of uncertainty in economic calculations, contrary to Keynes's claims. Pigou's Industrial Fluctuations (1927, esp. chs. 6 & 7) and Theory of Unemployment (1933), and Marshall's Principles (1920) explain economic fluctuations and unemployment partly by the uncertainties of economic agents (also see Ahiakpor 1997a)) (11) J. S. Mill ([1874] 1968: 55, 58) bases the idleness of productive capacity and lack of full employment on the failure of producers to estimate accurately future demands for their output. Mill explains that "the calculations of producers and traders being of necessity imperfect, there are always some commodities which are more or less in excess, as there are always some which are in deficiency" ([1847] 1968: 67). Furthermore, Mill writes:

[i]n the present state of the commercial world, mercantile

transactions being carried on upon an immense scale, but the

remote causes of fluctuations in prices being very little

understood, so that unreasonable hopes and unreasonable fears

alternately rule with tyrannical sway over the minds of a

majority of the mercantile public; general eagerness to buy and

general reluctance to buy, succeed one another in a manner more or

less marked, at brief intervals. Except during short periods of

transition, there is almost always either great briskness of

business or great stagnation; either the principal producers of

almost all the leading articles of industry have as many orders as

they can possibly execute, or dealers in almost all commodities have

their warehouses full of unsold goods. (Mill [1874] 1968: 68)

If economic agents were presumed to have perfect foresight in classical economics, the classics would have argued that market prices are always equal to their natural of normal values instead of gravitating toward the latter (e.g., Adam Smith [1776] 1976, 1: ch. 7; see also Marshall 1920: 28749, who notes that "we cannot foresee the future perfectly").

However, pointing out that the classical economists did not assume a world of certainties is not to give credence to the "financial instability hypothesis." The hypothesis pays no attention to the classical forced-saving mechanism that better explains the business cycle phenomenon it seeks to address. It is also founded on the false (but rather common) notion that banks' credit expansion is not based on savings deposited with them; (12) there is a false separation of "capital assets" from "current output," as if current output does not include capital goods; and a strange equation of profits with "financed investment" (Minsky 1985: 42). But the most significant defect of the hypothesis is that it sees a problem for the attainment of equilibrium for an economy because "the prices of current output--and the employment offered in producing output--depend upon shorter-run expectations" whereas "capital asset prices reflect long-run expectations" (Minsky 1985: 29) and these expectations can be misaligned.

The perceived problem arises partly from using Keynes's definition of investment to mean only the purchase of capital goods, following the Bohm-Bawerkian tradition (Ahiakpor 1997b), rather than the classical usage in which investment is the spending of savings or borrowed funds to purchase capital goods (fixed capital) and raw materials and to hire the services of land and labor (circulating capital). Conceived this way, we can appreciate that the same investor of borrowed funds must hold expectations over both the short run and long run, with the long run predominantly ruling. Few people enter upon a business venture with the intent to fold within a year or two. Even when hiring workers, most employers would like to keep them over the long haul or for as long as the business survives and the employees meet their contractual expectations. But should a business enterprise enter upon persistent losses, the capital goods can be sold to liquidate the venture. The markets for capital goods, land, labor, and credit are the venues through which unrealized expectations are resolved, resulting in changing prices and interest rates. Only by failing to recognize the equilibrating functions of these markets (as illustrated in Say's law of markets) does the financial instability hypothesis claim the existence of "financial instability [as] a normal functioning, internally-generated result of the behavior of a capitalist economy" (Minsky 1985: 26), which requires changes in government spending or a shift to "the achievement of full employment through consumption production" (Minsky 1985: 53) in order to stabilize it. (13)

The new Keynesians do not address the fundamental flaws of Keynes's arguments noted above. Rather, they have responded quite correctly to some arguments advanced by the new classicals and real business cycle theorists denying the usefulness of interventionist policies of government popularized by the Keynesian revolution. The new classicals argue that only unanticipated changes in monetary policies could affect employment and output in an economy since rationally acting individuals would not stand to lose their real purchasing power, which such policies require to produce their effects. But the existence of overlapping contracts enables changes in the quantity of money to have real effects over longer periods than would appear consistent with the new classicals' arguments. Similarly, the real business cycle theorists tend to argue that short-run fluctuations in employment and output are only the result of supply-side shocks, denying demand-side arguments. Building upon the rationality of individual-choice arguments, they also suggest that practically all unemployment is voluntary.

The new Keynesian responses to these arguments include (1) noting that product prices tend to be sticky over fairly long periods, as is observed for restaurant menus, (2) claiming that some firms pay higher than market-clearing wages in order to avoid the costliness of training new employees and also encourage the higher productivity of existing workers, the so-called efficiency-wage hypothesis, and (3) that unionized employees resist wage reductions in times of falling output demand, thus causing involuntary unemployment of some of their members, an "insider-outsider" modeling of the labor market. (14) The basic thrust of all these arguments is to deny the existence of perfect competition in product as well as in labor markets, and thus the failure of markets to adjust quickly enough to prevent involuntary unemployment. But the arguments would constitute a valid negation of the classical theories against which Keynes reacted if the "classics," including Pigou (1933), had assumed the existence of perfect competition in these markets. They did not. Such characterization of classical economics was one of Keynes's successful misrepresentations of their work.

The classics explained what would be the nature of an economy's adjustment process if competition were perfectly free, especially from government intervention. But such perfectly free competition depicts the freedom of entry and exit of firms in an industry rather than the modern perfect competition model in which firms themselves do not change prices but take them from some mythical market, with prices adjusting instantaneously. Thus Adam Smith posits the condition of "perfect liberty, or where [a man] may change his trade as often as he pleases" ([1776] 1976, 1: 63; see also 1: 70, 111) as one under which firms would earn normal profits and the market price frequently equal the long-run or natural price. And in contrasting free competition with monopoly, Smith explains that "[m]onopoly ... is a great enemy to good management, which can never be universally established but in consequence of that free and universal competition which forces everybody to have recourse to it for the sake of self-defense" ([1776] 1976, 1: 165). David Ricardo also describes a "system of perfectly free commerce" under which "each country naturally devotes its capital and labor to such employments as are most beneficial to each" (1951-1952, 1: 133).

Thus the model of markup pricing, which some post-Keynesians seem to construe as constituting a major refutation of classical economics because it does not fit the perfectly competitive model, is not alien to classical analysis. In principle, the markup price has to have some relation to a product's price elasticity of demand as well as its marginal cost if a firm seeks to maximize profits. But since the relevant variables are hard to estimate in practice, markup pricing is a trial-and-error process on the part of firms, a process quite consistent with the classical view of firms' adjustment of prices in the marketplace (e.g., Smith [1776] 1976, 1: ch. 7; J. S. Mill 1965, 3: 467-70). Of course, the attempt to use markup theory to explain the price level (value of money), as if an economy were one giant factory whose owner marks up direct input costs to determine "the economy's price" (Galbraith and Darity 1994: 396-97), is not meaningful or sound analysis.

Also contrary to the perfect knowledge assumption of the neoclassical perfect competition model, which Keynes attributes to the "classics," the latter made no such assumption. (15) Adjusting quantities or prices in the marketplace is a learning process in classical economics. Indeed, writing in the classical tradition, Alfred Marshall (1920: 448-49) rejects the applicability of the perfect competition model along with its perfect knowledge assumption to the classics and to any real economy. With respect to the labor market, Marshall notes that "if a man had sufficient ability to know everything about the market for his labor, he would have too much to remain long in a low grade. The older economists, in constant contact as they were with the actual facts of business life, must have known this well enough" (1920: 449). Marshall goes on to explain how the perfect knowledge assumption may have come mistakenly to be applied to the classics: "partly for brevity and simplicity, partly because of the term 'free competition' had become almost a catchword, partly because they had not sufficiently classified and conditioned their doctrines, they often seemed to imply that they did assume this perfect knowledge" (ibid.).

A. C. Pigou also rejects the perfect competition assumption, noting that:

With perfectly free competition among workpeople and labor perfectly

mobile, the nature of the relation [between the demand function for

labor and the real wage rate] will be very simple. There will always

be at work a strong tendency for wage-rates to be so related to

demand that everybody is employed. Hence, in stable conditions every

one will actually be employed. The implication is that such

unemployment as exists at any time is due wholly to the fact that

changes in demand conditions are continually taking place and that

frictional resistances prevent the appropriate wage adjustments from

being made instantaneously. In the absence of perfectly free

competition among workpeople the functional relation, if such

exists, between the wage-rate stipulated for and the state of demand

need not be of the above simple sort. (Pigou 1933: 252)

Pigou also explains that trade unions in "industries ... sheltered from foreign competition" create unemployment among their members by insisting on higher wage rates because "the leaders in charge of the bargaining ... prefer smaller aggregate earnings that give good incomes to a comparatively small number of men to larger aggregate earnings made up of a great number of poor incomes" (1933: 254). He notes that the system of "[s]tate-aided unemployment insurance with substantial rates of benefit" (1933: 254) tends to encourage such behavior among trade unions.

Pigou (1933: 293-94) further describes conditions in the marketplace that make it hard for wages to adjust to changes in the demand for goods and services, again showing the irrelevance of the perfect competition assumption. They include the fact that "[e]mployers are unwilling to grant real wage increases in good times for fear that, if they do so, they will be unable to recall them when the good times pass: workpeople are unwilling to accept reductions in bad times for fear that employers will refuse to rescind them when the bad times pass" (1933: 294). These arguments are hardly consistent with the "fluidity of money-wages" assumption Keynes ([1936] 1976: 257) attributes to the "classics." Only by ignoring the classical literature could one continue to accept Keynes's version of what they wrote.

Following Keynes's claim that the classics argued the neutrality of money or dichotomized the pricing process ([1936] 1976: 292-93), David Romer (1993) harps incessantly on the nonneutrality of money on real variables in the short run as one of the distinguishing features of the new Keynesian response to the new classical and real business cycle theorists. The latter are believed to be elaborating the alleged classical tradition of money's neutrality both in the short run and long run. Paul Davidson (1991) also harps on the nonneutrality of money on real variables as one of the fundamental disagreements Keynes had against classical economics and that the neoclassical Keynesians are willing to accept for the long run, but that the post-Keynesians reject. Fontana (2001) also claims that the nonneutrality of money (as well as choice) in Keynes's work is a distinguishing feature of his method of analysis from that of the classics. But the alleged neutrality of money in classical analysis in the short run is only a figment of Keynes's imagination.

The classics explain that changes in the quantity of money (currency) have real effects in the short run, changing real output and employment until all markets, including that of labor, have adjusted to the changed quantity. This is what the classical forced-saving doctrine is all about (Ahiakpor 1985, 1997a). David Ricardo also explains that in an economy in which there are proportional as well as absolute taxes, changes in the quantity of money do change relative prices and the composition of output in the long run even if the level of output and employment is unchanged (Ahiakpor 1985). Keynes ([1936] 1976: 80), on the other hand, misrepresents Jeremy Bentham's explanation of the forced-saving mechanism, claiming that it means the existence always of full employment, and attributes the same argument to "[a]ll the nineteenth-century writers who dealt with this matter" ([1936] 1976: 80-81). But his claims are a misrepresentation of the classics (Ahiakpor 1997a).

Finally, the classics, Marshall, and Pigou did focus on involuntary unemployment as a policy problem, contrary to Keynes's misrepresentation of their work (Ahiakpor 1997a). David Ricardo and J.-B. Say also explicitly noted the problem of involuntary unemployment when new machinery is introduced into the workplace. Ricardo observes that "the substitution of machinery for human labor, is often very injurious to the interests of the class of laborers.... the same cause which may increase the net revenue of the country, may at the same time render the population redundant, and deteriorate the condition of the laborer" (1951-1952, 1: 388; see also 1: 25-26, 36, 44, 80, 388-97; 5: 303). Say recognizes the same phenomenon and explains:

Whenever a new machine, or a new more expeditious process is

substituted in the place of human labor previously in activity,

part of the industrious human agents, whose service is thus

ingeniously dispensed with, must needs be thrown out of employ.

Whence many objections have been raised against the use of

machinery, which has been often obstructed by popular violence, and

sometimes by the act of authority itself.

... A new machine supplants a portion of human labor, but does not

diminish the amount of the product; if it did, it would be absurd to

adopt it. (Say 1834: 86)

Thus it would appear that Keynes attributed the assumption of full employment to classical arguments he had difficulty understanding, not because he had textual evidence to support his attributions.

Evidently, the old Keynesians, such as Tobin (1993) and Gordon (2000), post-Keynesians, and the new Keynesians are unaware of the extent of Keynes's misrepresentations of classical economics. Otherwise, they may simply have chosen not to deal with the textual evidence contradicting Keynes's claims as well as the fundamental flaws in the pillars upon which Keynes founded his new theory. (16) It is truly remarkable how little reference the post-Keynesians make to the classical literature itself, rather simply repeating Keynes's allegations. But it is going to be hard for the upcoming generation of economists exposed to the evidence contradicting Keynes's claims to continue to take Keynesian economics in any of its forms seriously. Like Marxism, Keynesianism may yet continue to exist as a viewpoint in search of theoretical or empirical validation, urging the activist role of government in economies.

Notes

(1.) This is the sense in which Milton Friedman declared that "We are all Keynesians now.... We all use the Keynesian language and apparatus," although he also added the incorrect observation that "none of us any longer accepts the initial Keynesian conclusions" (1968: 15).

(2.) See Landreth and Colander (2002: 490-93) for a brief history of post-Keynesianism. H. P. Minsky has championed an argument he calls the "financial instability hypothesis" as a "variant of Keynesian theory" (1985: 38) in a reaction to neoclassical Keynesianism. The argument is often associated with post-Keynesianism, although he employs the equilibrating mechanism of supply and demand to determine capital asset prices.

(3.) For an extensive summary of their work, see Froyen (2002: 289-96). King (1993) argues that the new Keynesians' efforts to sustain the life of Keynesian economics are a waste of research time and talent as they divert attention from relevant research. This without noting the fundamental flaws of Keynesian economics discussed below.

(4.) From the Cambridge equation, we derive the demand for money (currency) as H = kY and [DELTA]H = k[DELTA] Y + [DELTA]kY. The total amount of currency is held by households and non-households, including financial institutions, H = [H.sub.h] + [H.sub.nh]. The classics as well as their early neoclassical followers recognized that households hold or hoard cash, contrary to Keynes's claims, also repeated by Fontana (2001: 723) without contradiction. See Ricardo (1951-1952, 3:172; 6: 289, 300-01), Mill (1965, 3: 574), and Marshall (1923: 42, 44, 46).

(5.) It is partly on the basis of this Keynesian perspective that Minky (1985: 45) builds his financial instability hypothesis, in which a country's central bank and commercial banks are the source of the "supply of finance," independent of savings, and also the supply could be infinitely elastic.

(6.) David Ricardo (1951-1952, 1: 290) and J. S. Mill (1965, 3: 571-72) also affirm the point. Keynes (1936: 18, 369) mentions the arguments by Mill and Ricardo but evidently failed to appreciate their logic. Ahiakpor (2003a) elaborates.

(7.) Pigou (1941: 78) categorically rejects Keynes's claim that the classical economists asserted or implied that "full employment always exists."

(8.) Goods and services are produced with capital goods and labor, and the employment of labor relative to capital depends upon the wage-rental ratio. This is the essence of J. S. Mill's (1965, 2: 78-88) famous but apparently controversial argument that the "demand for commodities is not a demand for labor."

(9.) In Argentina the currency growth rate rose from 418% in 1988 to 7,446% in 1989 and declined to 589% in 1990. The bank deposit interest rate rose from 372% to 17,236% and declined to 1,515% in those years, respectively. In those same years, currency growth rates were 306%, 2,415%, and 1,835% in Brazil, while the bank deposit interest rate rose from 859% in 1988 to 5,845% in 1989, and to 9,394% in 1990. In Peru the currency growth rate was 568% in 1988 and soared to 1,437% in 1989 and to 7,783% in 1990, while the deposit interest rote rose from 162% in 1988 to 1,136% in 1989 and to 2,440% in 1990. By 1994 the currency growth rate in Argentina had declined to 8.5%, while the deposit interest rate also went down to 8.1%. Currency growth rate that year was 31% in Peru, while that country's bank deposit interest rate also declined 22.4%. Only in Brazil did the deposit rate stay high at 5,175%, along with a high currency growth rate of 2,242%.

(10.) A variant of this view is Minsky's (1985: 51-52) claim that "the emphasis upon growth through investment, the bias towards bigness in business, business styles that emphasize advertising and overheads, and the explosion of transfer payments are the main causes of our current inflation." Like Keynes, this view has no room for the classical quantity theory of money as the basis for explaining inflation.

(11.) Marshall includes "the rapidity of invention, the fickleness of fashion, and above all the instability of credit" among the factors that "certainly introduce disturbing elements into modern industry," creating the "inconstancy of employment" (1920: 572-73; emphasis added).

(12.) The argument has a foundation in Keynes's (1930: 25-26) claim that it is bank lending that creates customers' deposits, rather than the other way around. Of course, Keynes's argument follows those of Knut Wicksell (1898: 110-11) and A. C. Pigou (1927: 123-24); see Ahiakpor (2003b: ch. 2, esp. 46-52). But banks only lend a fraction of their customers's deposits, keeping the unlent portion in readiness to pay cash on demand or to fulfill legal reserve requirements (see Kohn 1993: 207; Hubbard 2002: ch. 13). Indeed, the so-called bank deposit multiplier process works only if recipients of the spent borrowed funds make new deposits with them.

(13.) There are some other aspects of Minsky's hypothesis that need not be discussed here, including his characterization of some financial activities in advanced capitalist economies as "Ponzi schemes."

(14.) See Froyen (2002: 289-96) for an informative summary.

(15.) Fontana (2001: 720-75) repeats Keynes's charge without contradiction. Of course, he makes no reference to the classical literature itself.

(16.) Indeed, when confronted with some evidence of Keynes's misrepresentation of classical economics in the summer of 1995, some of the leading lights on the Post Keynesian Thought network simply took themselves off the discussion list rather than deal with it. Others talked past the evidence.

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JAMES C. W. AHIAKPOR *

* The author is at the Department of Economics, California State University, Hayward.

An earlier version of this paper was presented at the History of Economics Society Conference at Duke University, Durham, NC, July 47, 2003.

COPYRIGHT 2004 American Journal of Economics and Sociology, Inc.

COPYRIGHT 2004 Gale Group

(http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#4284731)

probably just myself.

(http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#4295541)

(until some other douchebag bumps it in a week)

(http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#4295625)

A few years ago, while browsing around the library downtown, I had to take a piss. As I entered the john a big beautiful all-american football hero type, about twenty-five, came out of one of the booths. I stood at the urinal looking at him out of the corner of my eye as he washed his hands. He didn't once look at me. He was "straight" and married -- and in any case I was sure I wouldn't have a chance with him. As soon as he left I darted into the booth he'd vacated, hoping there might be a lingering smell of shit and even a seat still warm from his sturdy young ass. I found not only the smell but the shit itself. He'd forgotten to flush. And what a treasure he had left behind. Three or four beautiful specimens floated in the bowl. It apparently had been a fairly dry, constipated shit, for all were fat, stiff, and ruggedly textured. The real prize was a great feast of turd -- a nine inch gastrointestinal triumph as thick as a man's wrist. I knelt before the bowl, inhaling the rich brown fragrance and wondered if I should obey the impulse building up inside me. I'd always been a heavy rimmer and had lapped up more than one little clump of shit, but that had been just an inevitable part of eating ass and not an end in itself. Of course I'd had jerk-off fantasies of devouring great loads of it (what rimmer hasn't), but I had never done it. Now, here I was, confronted with the most beautiful five-pound turd I'd ever feasted my eyes on, a sausage fit to star in any fantasy and one I knew to have been hatched from the asshole of the world's handsomest young stud. Why not? I plucked it from the bowl, holding it with both hands to keep it from breaking. I lifted it to my nose. It smelled like rich, ripe limburger (horrid, but thrilling), yet had the consistency of cheddar. What is cheese anyway but milk turning to shit without the benefit of a digestive tract? I gave it a lick and found that it tasted better then it smelled. I've found since then that shit nearly almost does. I hesitated no longer. I shoved the fucking thing as far into my mouth as I could get it and sucked on it like a big brown cock, beating my meat like a madman. I wanted to completely engulf it and bit off a large chunk, flooding my mouth with the intense, bittersweet flavor. To my delight I found that while the water in the bowl had chilled the outside of the turd, it was still warm inside. As I chewed I discovered that it was filled with hard little bits of something I soon identified as peanuts. He hadn't chewed them carefully and they'd passed through his body virtually unchanged. I ate it greedily, sending lump after peanutty lump sliding scratchily down my throat. My only regret was the donor of this feast wasn't there to wash it down with his piss. I soon reached a terrific climax. I caught my cum in the cupped palm of my hand and drank it down. Believe me, there is no more delightful combination of flavors than the hot sweetness of cum with the rich bitterness of shit. Afterwards I was sorry that I hadn't made it last longer. But then I realized that I still had a lot of fun in store for me. There was still a clutch of virile turds left in the bowl. I tenderly fished them out, rolled them into my hankerchief, and stashed them in my briefcase. In the week to come I found all kinds of ways to eat the shit without bolting it right down. Once eaten it's gone forever unless you want to filch it third hand out of your own asshole. Not an unreasonable recourse in moments of desperation or simple boredom. I stored the turds in the refrigerator when I was not using them but within a week they were all gone. The last one I held in my mouth without chewing, letting it slowly dissolve. I had liquid shit trickling down my throat for nearly four hours. I must have had six orgasms in the process. I often think of that lovely young guy dropping solid gold out of his sweet, pink asshole every day, never knowing what joy it could, and at least once did, bring to a grateful shiteater.

(http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#4636377)

(http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#4636395)

*rolls dice*

>

(http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#6796661)

http://itt-we-record-the-legend-of-don-barzini.autoadmit.com/thread.php?thread_id=422960&mc=50&forum_id=2

(http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#6796696)

Also, the post above this is where you delete your reply in a cryptic manner.

(http://www.autoadmit.com/thread.php?thread_id=295596&forum_id=2#7844592)