Keynesian Money Illusion: does it work?

Prior to reading this thread, please see this thread on Say's Law for context: http://mises.org/Community/forums/p/7410/127588.aspx#127588

Pay particular attention to my posts. I repeat a salient passage from that thread here:

These are fundamental and rather simple distinctions. Keynes believes "animal spirits" cause endogenous ([sic] exogenous) demand shocks. Austrians, and Say, argue that endogenous demand shocks are impossible in a truly free market economy, with the exception of either government interventions or natural disasters and such.  

The followup to that thread is to discuss the question posed by both Keynesianism and the Austrian School (which, as I posited in the prior thread, seem to agree that Aggregate Supply (AS) does not change, but Aggregate Demand does change):  how to get Aggregate Demand (AD) "back to normal" after such a shock (caused by government, natural disasters, or, my favorite, "and such")?

We'll leave the Austrian reply for another thread (which I think involves some hocus-pocus involving how the gold standard and a fixed money supply magically either prevents demand shocks and/or abolishes the business cycle and/or magically gets AD back to normal).  In this thread, I would like to discuss the Keynesian solution to getting AD back to normal, which involves the technique of the "helicopter drop" or "Money Illusion".

For those of you that have never taken a university course in economics, which, sadly, seems to be the majority, I will give a brief primer of the "helicopter drop" technique for increasing society's Aggregate Demand.  Suppose due to government intervention, natural disasters, or "and such" (panic?  Joker's Wild), somehow AD falls.  We are in a recession.  People are hoarding money.  Nobody wants to spend money because they are afraid, or think they can buy goods later for less money, or some other reason.  Ben Bernanke gets into a Boeing CH-47 Chinook (Model 234LR, civilian version), loaded with 12 tonnes of paper money, and begins dropping dollar bills onto denizens in major metropolitan regions.  How did he get that money?  Not by working for it--it was just created overnight in the Bureau of Engraving and Printing.  It's fiat money not even backed by prior US government committments but brand new money.  He does this 100 times in 100 major cities.  No, make that 1000 times.  No, make that a million times.  What happens?  People get the money, and some of them spend it.  This stimulates the economy. The hoarding spell is broken.  AD begins to rise again.  Soon, it's "business as usual", recession over.

What's wrong with this picture?  First, Ben himself would not spread the cash--it would be some government department, probably the US military, so they would use a military CH-47.  More fundamentally, people have argued (conservative economists, yes, but Austrians?  I'm curious as to their position) that this is a form of "Money Illusion", and that people will, after the n-th drop, figure out this money is being printed overnight and is rapidly becoming worthless.  The criticism is a good one, but there's two rebuttals by Keynes: first, where is "n-th"?  Is it after the first drop?  The 99th drop?  The 999,999th drop?  If it's the first drop, then Money Illusion (MI) does not work--the helicopter drop will have to effect on AD.  If it's the 99th drop, MI does work initially, but over time it's attentuated.  If it's the 999999th drop, then MI works fine--by the time the people figure out they have been "duped", then the economy will be back to normal, and perhaps at a cost of some future inflation and voter/citizen ire, it's "business as usual" and MI has worked (although you can argue it may not work again in the future, once people cotton onto this technique--this essentially was the point made by proponents of the "Rational Expectations" school of the 1980s).

Unlike the Austrians with their theories, the Keynesians actually have proof that Money Illusion works (again, I'm not 100% sure on what the Austrians believe with respect to MI or anything else--like the French philosophers like Jacques Derrida, they are hard to pin down).  Two pieces of evidence:  stock splits, and university experiments in sociology labs involving student volunteers and real money.

With stock splits, it has been observed that a 2-for-1 stock split will almost always result in the stock price going up the next day--when logically it should not, on average, change much.  This is a form of money illusion.  I have seen this work with people I know.  And intuitively people like it when they have "double the shares they had yesterday".  Not logical, but Daniel Kahneman won the Nobel Prize in Economics for exactly this sort of thinking.

With numerous university experiments, involving student volunteers and real money (cash prizes) researchers have shown MI exists, see, for example, "Money Illusion and the Market", Jean-Robert Tyran, Science 24 August 2007 317: 1042-1043 ["Individuals often pay more attention to price tags than to real value. Evidence shows that this may also have important effects on markets."]

Conclusion:  Keynesianism works, much as we hate to admit it.  Money illusion, a central tenant of Keynesianism, works.

 More information on MI: http://en.wikipedia.org/wiki/Money_illusion

It "works" insofar as if you define "works" to be "dupes the suckers into believing that it will actually help".

RayLopez:

We'll leave the Austrian reply for another thread (which I think involves some hocus-pocus involving how the gold standard and a fixed money supply magically either prevents demand shocks and/or abolishes the business cycle and/or magically gets AD back to normal).

RayLopez:

or those of you that have never taken a university course in economics, which, sadly, seems to be the majority, I will give a brief primer of the "helicopter drop" technique for increasing society's Aggregate Demand.

I like how you are 100% ignorant of the austrian position, and yet accuse the people here of not understand very simplistic (and refuted) economic ideas. We know how the helicopter drop "works." If you understood the austrian business cycle theory at all, you would understand why it doesnt. There are plenty of books and essays for free on this site.

RayLopez:

 People are hoarding money.  Nobody wants to spend money because they are afraid, or think they can buy goods later for less money, or some other reason.

The "problems" of hoarding / paradox of thrift and deflationary spiral have been discredited. Again, the information is available on this site.  

RayLopez:

More fundamentally, people have argued (conservative economists, yes, but Austrians?  I'm curious as to their position) that this is a form of "Money Illusion", and that people will, after the n-th drop, figure out this money is being printed overnight and is rapidly becoming worthless.

The problem is that inflation raises prices / devalues the currency.  This doesnt happen because people realize that the Fed is printing money, it happens naturally, just because there is more money.  There is not a point at which people suddenly realize that the money is not as valuable as it once was and then raise prices (I suppose there is a point at which people realize it, but that is not what causes the problems of inflation, and would not allow them to stop it).

RayLopez:

With stock splits, it has been observed that a 2-for-1 stock split will almost always result in the stock price going up the next day--when logically it should not, on average, change much.  This is a form of money illusion.

A lot of people see stock splits as a sign that managers are optimistic about the future.  Stock prices are affected significantly by these types of signals, whether it is logical or not. It also increases liquidity.  These are two tangible reasons why the stock price would increase.  I dont think it is a sign of "money illusion" and to the extent that it is I dont see how it would apply to the reality of an economic recession - that capital has been malivested in certain sectors and needs to be liquidated to align with consumer preferences.  Again, an understanding of austrain economics is vital here.

As for the experiments, we would need more information. But regardless, even if peoples preferences are at time irrational, it does not point to money infusion as a way to adjust the capital structure of an economy. In fact, ABCT (thats "austrian business cycle theory," I know you are not too educated in this stuff) explains exactly why that would slow down the process.

RayLopez:

 Keynesianism works, much as we hate to admit it.

 

When has Keynesianism ever worked? The great depression? The 70's?

Given how often it has been tried, you would think that if it did work, there would be more than stock splits and university experiments to back it up!

BobT:

RayLopez:

 Keynesianism works, much as we hate to admit it.

 

When has Keynesianism ever worked? The great depression? The 70's?

Indeed, the Depression, the end of WWII and the 70s all prove Keynesian economics to be absolute bunk.

The stimulus spending of the Depression did not work. From  Morgenthau

“We have tried spending money. We are spending more than we have ever spent before and it does not work.”

“I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot!”,

Keynesians argued that the troops returning at the end of WWII would create massive unemployment.  Instead, government cut taxes by one third, spending by two thirds and the economy boomed.  That was the second major refutation of Keynesian economics.

And finally in the 70s, there were rising prices and rising unemployment, two conditions that cannot occur simultaneously under Keynesian precepts and yet they did.

 

 

Sadly I agree with Ray. Keynesianism works, and works well. It is morally wrong to say the least, it slowly robs people of the fruit of its own labor and is based on nothing more than thin air but it works. It works because 1) people are kept in ignorance (nor that they need it since most are just too stupid for their own good) and is easy telling them inflation is not caused by printing presses working overtime but by greedy Arabian sheiks and Chinese oligarchs 2) people need to believe government is omnipotent and can control everything. An example? The present economic crisis is already over because each given day a politician went on TV and said "it's all over now, we can breath freely now". Yes, you can fool all people all the time.

I know I will sound like the old disillusioned geezer that I am but I told you so. Honesty, integrity and hard work do not win the day. Cheating and lying do, especially when they get a helping hand from stupidity.

Do not think I am not angry: I see the fruits of my labor eroded daily and the savings of a lifetime getting progressively worthless. But there's nothing we can do. They won, we lost. End of story.

Sadly I agree with Ray. Keynesianism works, and works well.

Yes, it has worked so well that we are currrently suffering a second depression in 100 years because of it.

Ray - Don't assume that people here don't know Keynsian economics, many of us have been through programs of study in just that, myself included. 

What you don't understand is Austrian economics, which recognizes a simple fact:  Savings and capital investment are what allow an economy to grow.  It is only through consuming (consuming degrades or destroys the thing being consumed, in case you're unsure) less today and using the freed resources, labour, and goods in lengthier production processes that we can consume more tomorrow.  There is no other way.

You're assuming that consumption drives economic growth and that Keynes was right about this, when he wasn't.  As Say's Law (in its true form) shows us, all consumption is only possible because of prior production.  If you raise AD, you're by definition reducing future supply and consumption. Sure, you can raise consumption today beyond what it would have been otherwise, but you are stunting further capital formation (or even consuming capital, as we certainly are today) by doing so.

Sorry that you find this so hard to understand.  You might benefit from reading Economics in One Lesson or something equally simple to start you on your very necessary journey of learning about basic economics.

Somehow believing in illusions and allowing more consumption than can be sustained in the name of "growth" is taken to be sound economics, and the idea that production must take place for their to be sustainable consumption is antediluvian. I sometimes despair at how stupid people are today. As if putting Keynesian mysticism in technical language makes it any more valid.

RayLopez:

Pay particular attention to my posts.

Comes straight in with a classic line just to remind us how much better than us he is. You can pay attention to everyone's posts. But pay particular attention to his.

WisR:

Sorry that you find this so hard to understand.  You might benefit from reading Economics in One Lesson or something equally simple to start you on your very necessary journey of learning about basic economics.

And this is all one can fairly say, really.

Kakugo:

... there's nothing we can do. They won, we lost. End of story.

There is much we can do - educating ourselves and others, not being afraid to just say know, and strengthening our spines.

They haven't won nor have we lost. This shituation wasn't created in a day nor will it be resolved in one. We may be approaching an inflection point in the forseeable future though that may be a great opportunity to tilt the table in our favor?

The story will never end but will eventually evolve towards the truth.

Keep the faith Kakugo - afterall, hope and change is what was promised in an Obama nation, let's not dissapoint H.I.M.

 

Kakugo--I am happy to see you are rational and have not drunk the Kool-Aid.  I share your conviction.  Notice none of the posters to date have refuted my points--which were backed by evidence.  For example, the old rebuttal that a stock split price rise is due to the investors feeling that managers have confidence in their stock is rebutted by simple logic--if that was true, why is Berkeley Hathaway, priced at close to $100k a share, so successful?  This is a priori reasoning.  Also, note that poster did not rebut the Science magazine reviewed article--nor even say he would read it.  As Nobelian Paul Krugman has written (himself biased I will admit), some of these right-wing economists only read and believe what they want to--not what the evidence states.  As Keynes has said, he will believe what the evidence shows, and, when the evidence changes, he would change his mind.

Some of these Mises members remind me of Hari Krishna members.  Shame because I have in the past supported Mises. org with financial contributions.  I might have to rethink this.

Reality:  Keynesianism works.  Money illusion works.  People like government. Sad but true.  I personally think government is irrelevant--and at best a drag on the economy, at worse a long term danger since they tend to run deficits that are unchecked.  This is based on the Solow model of economic growth (which shows government spending is irrelevant, long term, only technological progress matters) and based on evidence presented by the economist Madison, showing with Keynesianism full swing in 1960, GNP in the advanced economies was slightly ahead of the GNP in the late 19th century, when laisse faire was in full swing.  This shows that Keynesianism either 'works' or is not harmful.  In fact, on a per capita basis, GDP post 1960s is statistically clearly ahead of GDP in the late 19th century early 20th century period (before WWI and the curious death of liberal England, to coin a phrase), and, volatility in the economic cycle is down.  In the 19th century, you had almost the same growth, true, but more "boom and bust", which is unsettling to a lot of people (recall Americans love insurance--they are the most heavily insured people in the world, and, btw, I have argued back in October that the credit crisis was, by 19th century standards, not that severe--but you noticed the hysterical reaction that the change in Libor rates caused, which precipitated the flawed and wrong bailouts).

RL

 

“When convincing evidence refutes what I previously believed, I change my opinion. What do you do sir?” John Maynard Keynes

RayLopez:

or example, the old rebuttal that a stock split price rise is due to the investors feeling that managers have confidence in their stock is rebutted by simple logic--if that was true, why is Berkeley Hathaway, priced at close to $100k a share, so successful?

The fact that investors may take a stock split as a good sign and that it will therefore raise the stock price, does not in any way imply that a sucessful company cant have a high share price. Do you seriously consider that your statement to be logical in any way? The two ideas are not related at all.

RayLopez:

lso, note that poster did not rebut the Science magazine reviewed article--nor even say he would read it.

And you have read nothing of austrian economics, as you make clear by your complete lack of understanding of the ABCT. Seems like you only read what you want to believe.... I adressed the fact that the results of the experiment would not have anything to do with the reality of a misaligned capital structure of an economy.

RayLopez:

As Keynes has said, he will believe what the evidence shows, and, when the evidence changes, he would change his mind.

Funny, because whenever Keynsianism was tried in recessions, it didnt work.  Also, stagflation is supposed to be impossible according to Keynes, but it happened in the 70's.  And yet, Keynesians haven't changed their theories.  What evidence is there for Keynesianism?

RayLopez:

Keynesianism works.  Money illusion works.

When has it ever worked?

RayLopez:

eynesianism full swing in 1960, GNP in the advanced economies was slightly ahead of the GNP in the late 19th century, when laisse faire was in full swing.  This shows that Keynesianism either 'works' or is not harmful.  In fact, on a per capita basis, GDP post 1960s is statistically clearly ahead of GDP in the late 19th century early 20th century period

Wait, are you seriously saying that because GNP was higher in the 1960s than in the late 1800s, Keynesianism works? I just want to get that clear. If so, that is the biggest load of nonsense I have ever heard.  The fact that output increased over 70 years does not in any way support Keynesianism. There are so many things wrong with this it is hard to know where to start, it is just not a logical conclusion at all.

RayLopez:

“When convincing evidence refutes what I previously believed, I change my opinion. What do you do sir?” John Maynard Keynes

Well, he has been both empirically and theoretically proven wrong time and time again.  So either he and his supporters are ignorant or just liers. 

BobT:

RayLopez:

or example, the old rebuttal that a stock split price rise is due to the investors feeling that managers have confidence in their stock is rebutted by simple logic--if that was true, why is Berkeley Hathaway, priced at close to $100k a share, so successful?

The fact that investors may take a stock split as a good sign and that it will therefore raise the stock price, does not in any way imply that a sucessful company cant have a high share price. Do you seriously consider that your statement to be logical in any way? The two ideas are not related at all.

What you fail to grasp is that your argument is just as tenable or untenable as the argument that the stock split phenomena is caused by Money Illusion (MI).  Just saying that it's "investor confidence" does not make it so.  And, your hypothesis, unlike the MI hypothesis, fails to account for Berkley Hathway stock.

 

BobT:

RayLopez:

lso, note that poster did not rebut the Science magazine reviewed article--nor even say he would read it.

And you have read nothing of austrian economics, as you make clear by your complete lack of understanding of the ABCT. Seems like you only read what you want to believe.... I adressed the fact that the results of the experiment would not have anything to do with the reality of a misaligned capital structure of an economy.

You completely fail with this argument.  The right thing to do is to promise to read the Science article, which was exhaustive and extensively reported.  It was a culmination of numerous laboratory experiments in social science that shows MI works.  Instead, you direct me to ABCT.  That's not at issue here--MI is the issue, and specifically scientific proof that it exists.

 

BobT:

RayLopez:

eynesianism full swing in 1960, GNP in the advanced economies was slightly ahead of the GNP in the late 19th century, when laisse faire was in full swing.  This shows that Keynesianism either 'works' or is not harmful.  In fact, on a per capita basis, GDP post 1960s is statistically clearly ahead of GDP in the late 19th century early 20th century period

Wait, are you seriously saying that because GNP was higher in the 1960s than in the late 1800s, Keynesianism works? I just want to get that clear. If so, that is the biggest load of nonsense I have ever heard.  The fact that output increased over 70 years does not in any way support Keynesianism. There are so many things wrong with this it is hard to know where to start, it is just not a logical conclusion at all.

You are confused.  I am saying that Big Government is traditionally equated with Keynesianism.  This is wrong say some (not all) Keynesians.  In fact, Keynesianism is supposed to be a very SHORT TERM solution. It is supposed to be COUNTER-CYCLICAL.  I trust you know what this means--you seem a cut above the average poster that posts here--but if you don't know what this means let me know.  But, despite this definition, in the minds of some Keynesianism (K) means Big Government (BG).  So, taking BG as a superset of K, it can be shown that even with BG post-1960s to mid-1990s, economic growth did not suffer (when government, in the EU and US, went up dramatically--for example, government spending in Spain went from less than 15% of GNP to nearly 50%, as opposed to about 12% for industrial countries pre-WWI).Here is some data (Maddison, 1995 data):  real GDP per capita, 1990 prices:  from 1870 to 1913 (Period 1) vs. 1960-1990 (Period 2) (when BG increased), various countries, annualized real growth:  AVERAGE OF 17 INDUSTRIALIZED COUNTRIES:  1.3%/year in Period I vs.2.7%/yr in Period 2, and, with period 1 coming before 2:  UK: 1.0, 2.2%; USA: 1.8, 2.0%; Japan: 1.0, 5.3%(!); Canada: 2.3%, 2.7%; Australia: 0.9, 2.3%; Spain: 1.2, 3.8%.  And Spain increased BG BIG TIME after 1960.

In short, BG does not hurt growth, in fact INCREASES growth.  Ergo, K being a subset of BG, K cannot hurt growth either.

When the facts change...what do you do Sir?

RL

RayLopez:

fails to account for Berkley Hathway stock

It is Berkshire Hathaway.  Hard to take your argument seriously when you don't know the name of the stock your argument is based on.

liberty student:

RayLopez:

fails to account for Berkley Hathway stock

It is Berkshire Hathaway.  Hard to take your argument seriously when you don't know the name of the stock your argument is based on.

 

Wow.  That's lame.  Is that the best you can do?  A better argument, that I'll make for you, is that the Maddison (sic: I also had misspelled his name as 'Madison' in the OP--oops!  I guess that makes my arguments wrong, right?) data goes from 1960 to 1990, and not from 1970 to 1991, which would have included a recession year, and also avoided the robust 1960s.  However, even with such data mining, the results show that growth in 17 industrial countries is statistically better with big government than without.  Another argument made, that also ultimately fails, is that you should not include Japan and such countries in the data, since they were not really developed.  Never mind that the Japanese beat the Russians pre-WWI, and never mind Spain had a colonial empire, but, even if you take out all countries except the UK and the US, you'll find big government (BG) did not, under any period, hurt growth for these two countries.  At best, it didn't help.  So, you can say BG is neutral, or, if you're a liberal like economist Paul Krugman, you can even make (and Keynesians have made) the argument that BG helps growth.

When the facts change...What do you do Sir?

 

 

RayLopez:

What you fail to grasp is that your argument is just as tenable or untenable as the argument that the stock split phenomena is caused by Money Illusion (MI).  Just saying that it's "investor confidence" does not make it so.  And, your hypothesis, unlike the MI hypothesis, fails to account for Berkley Hathway stock.

I dont think my argument (investor confidence) is proven to be why stock prices increase after a stock split. I was saying that stock prices raising after a split is not proof of money illusion. You are saying that because the prices increase, it must be due to money illusion. I provided two other reasons why the price may increase.  I do not have proof for either, but I was saying that you would need more proof to show that stock splits raise the price due to money illusion.

My hypothesis was not meant to account for berkshire hathway, at all. That is what I was saying.  All I did was give examples of other explainations of why the price may rise after a stock split. I did not, by any means, say that sucessful companies must have a low stock.  The mere fact that Berkshire Hathway is sucessful and has a high stock price, does not have anything to do with the hypothesis that a stock split can often be taken as a good sign and therefore raise prices.  Do you see what I mean? The Berkshire thing is completely unrelated to what I was saying.

RayLopez:

You completely fail with this argument.  The right thing to do is to promise to read the Science article, which was exhaustive and extensively reported.  It was a culmination of numerous laboratory experiments in social science that shows MI works.  Instead, you direct me to ABCT.  That's not at issue here--MI is the issue, and specifically scientific proof that it exists.

I told you that I do not need to read the article, because I am not disputing the results.  I am positive that it could have shown that students would prefer an irrational outcome due to the amount of money as opposed to value, or whatever the experiment shows.  But, I am saying that that does not support money illusion's ability to fix a recession.  I say this because, even if printing money made people spend more (i am not aruging whether it does or doesnt), this does not solve a recession.  There is a real and actual disconnect between the capital structure of an economy and consumer preferences.  This can not be solved with an illusion, it is a fact that must be dealt with through liquidation, time, and some difficulty.  ABCT explains this, which is why I pointed it out to you.  It explains why an illusion can not change reality.

Me saying that you should read austrian economics was not the extent of my argument, it was just pointing out your hypocracy.

RayLopez:

You are confused.  I am saying that Big Government is traditionally equated with Keynesianism.  This is wrong say some (not all) Keynesians.  In fact, Keynesianism is supposed to be a very SHORT TERM solution. It is supposed to be COUNTER-CYCLICAL.  I trust you know what this means--you seem a cut above the average poster that posts here--but if you don't know what this means let me know.

I agree that Keynesianism is supposed to be counter-cyclical, in that the central bank is supposed to lower interest rates during a recession, and raise them during a boom, to stabilize the economy.  However, it is often equated with big government because big government uses keynesianism to justify expansion (especially during recessions) and does not shrink to pre-crisis levels after the crisis, it just keeps growing.  The fact is that right now we have the biggest government we have ever had, and they are using Keynesianism to try to grow it significantly more. So, in practice, Keynesianism has been equated with BG

RayLopez:

So, taking BG as a superset of K, it can be shown that even with BG post-1960s to mid-1990s, economic growth did not suffer (when government, in the EU and US, went up dramatically--for example, government spending in Spain went from less than 15% of GNP to nearly 50%, as opposed to about 12% for industrial countries pre-WWI).

No one is saying the economy can not grow under Keynesian policy.  It is true that government has grow consistently, and the economy has grown (on average).  However, Keynesianism has worsened the boom/bust cycle.  We are arguing that without a central bank (necessary for Keynesianism), the boom/bust cycle would not exist or be nearly as bad.  In addition, the economy would have grown faster without BG policies.

RayLopez:

Here is some data (Maddison, 1995 data):  real GDP per capita, 1990 prices:  from 1870 to 1913 (Period 1) vs. 1960-1990 (Period 2) (when BG increased), various countries, annualized real growth:  AVERAGE OF 17 INDUSTRIALIZED COUNTRIES:  1.3%/year in Period I vs.2.7%/yr in Period 2, and, with period 1 coming before 2:  UK: 1.0, 2.2%; USA: 1.8, 2.0%; Japan: 1.0, 5.3%(!); Canada: 2.3%, 2.7%; Australia: 0.9, 2.3%; Spain: 1.2, 3.8%.  And Spain increased BG BIG TIME after 1960.

Again, you are saying that the economy was better from 1960-1990 than in 1870-1913, therefore Keynesianism works. This is logically nonsense.  Of course the economy is better, there was tons of technological development, increased education, higher population, etc, - in other words, workers were more productive, and there were more of them.  I would say that in the absence of complete socialism, it is logical to expect the economy to increase over time.  It does not mean that the policies of a later time are necessarily better than that of the older.  It just is not a logical conclusion.

Besides, GNP is not an accurate measure of economic growth.  For one thing, it includes government spending, so of course it will grow faster when government is growing faster.

RayLopez:

In short, BG does not hurt growth, in fact INCREASES growth.  Ergo, K being a subset of BG, K cannot hurt growth either.

All that this data has show is that the economy can grow in spite of BG, nothing more.

RayLopez:

When the facts change...what do you do Sir?

They haven't. I am wholly unconvinced.

 

RayLopez:

Wow.  That's lame.  Is that the best you can do?

No.  I posted 3 refutations of Keynesianism up thread.  You have not addressed them.

RayLopez:

So, you can say BG is neutral, or, if you're a liberal like economist Paul Krugman, you can even make (and Keynesians have made) the argument that BG helps growth.

Big government is a priori a wealth destroyer.  Your entire argument is that counterfeiting improves the economy and that the power of compound interest on servicing debt doesn't compromise long term growth.

RayLopez:

When the facts change...What do you do Sir?

What facts?  You've mentioned (not even sourced) government statistics that prove that government is good.

Address the three major economic events I posted.  They show that the foundation for Keynesian economics is absolutely false.  Which means that any conclusions you are drawing about Keynesianism, are coincidence at best, and in no way a validation of Keynesianism as a school of thought.

BobT:

I dont think my argument (investor confidence) is proven to be why stock prices increase after a stock split. I was saying that stock prices raising after a split is not proof of money illusion. You are saying that because the prices increase, it must be due to money illusion. I provided two other reasons why the price may increase.  I do not have proof for either, but I was saying that you would need more proof to show that stock splits raise the price due to money illusion.

OK.  Let's take the stock split example--which was not a scientific study, like reported in Science, but just as easy thought experiment--off the table, in view of the fact that you do not dispute MI works in at least a lab setting, and, possibly, even in the real economy ("I told you that I do not need to read the article, because I am not disputing the results.").  Score one for me.  But I'll be fair below when you score a good point too, read on please.

 

BobT:

I agree that Keynesianism is supposed to be counter-cyclical, in that the central bank is supposed to lower interest rates during a recession, and raise them during a boom, to stabilize the economy.  However, it is often equated with big government because big government uses keynesianism to justify expansion (especially during recessions) and does not shrink to pre-crisis levels after the crisis, it just keeps growing.  The fact is that right now we have the biggest government we have ever had, and they are using Keynesianism to try to grow it significantly more. So, in practice, Keynesianism has been equated with BG

RayLopez:

So, taking BG as a superset of K, it can be shown that even with BG post-1960s to mid-1990s, economic growth did not suffer (when government, in the EU and US, went up dramatically--for example, government spending in Spain went from less than 15% of GNP to nearly 50%, as opposed to about 12% for industrial countries pre-WWI).

No one is saying the economy can not grow under Keynesian policy.  It is true that government has grow consistently, and the economy has grown (on average).  However, Keynesianism has worsened the boom/bust cycle.  We are arguing that without a central bank (necessary for Keynesianism), the boom/bust cycle would not exist or be nearly as bad.  In addition, the economy would have grown faster without BG policies.

Again, you are saying that the economy was better from 1960-1990 than in 1870-1913, therefore Keynesianism works. This is logically nonsense.  Of course the economy is better, there was tons of technological development, increased education, higher population, etc, - in other words, workers were more productive, and there were more of them.  I would say that in the absence of complete socialism, it is logical to expect the economy to increase over time.  It does not mean that the policies of a later time are necessarily better than that of the older.  It just is not a logical conclusion.

Besides, GNP is not an accurate measure of economic growth.  For one thing, it includes government spending, so of course it will grow faster when government is growing faster.

All that this data has show is that the economy can grow in spite of BG, nothing more.

Re technical advance:  you are making the claim that growth should accelerate over time, because science builds on itself.  Trouble is, the traditional Solow model for growth (catch it here: https://www.kitcomm.com/showthread.php?t=39368&page=2&highlight=solow ) does not support this thesis.  But, to give you a benefit of the doubt, I've seen certain variants of the so-called Romer version of Solow's model that does make such an assumption.  But, the problem is you can't test this.  You're essentially saying: "if it wasn't for government, and if {fill in your pet peeves or pet projects here, like gold standard}, we would have even higher growth!". That perhaps is true, but you can't prove it.  Another interesting consequence of the Solow model is that government spending is neutral, and really does not affect growth--only thesingle non-government variable called techological growth does. So to make your argument work, you would have to assume that with less government (and {PET PROJECTS HERE}), you would accelerate the rate of change in technological growth.  Again, no evidence of this, save one (and I'm giving you partial credit here):  there is evidence that scientific growth is based on population size--the bigger the working population, the greater the "Einsteins" in it, and the more inventions, hence the more growth.  By freeing up non-productive government employees so that they can become productive scientists, you would get faster growth, since your population size would increase.

But, the extent of your growth cannot easily be measured even under this theory.  And, I'll point out a single counterexample (which, like the stock split example, is not meant to be exhaustive): Einstein deduced some of his theories--I believe it was the photoelectric effect and/or Brownian motion--while a clerk for the Swiss patent office (i.e., a government employee).

Conclusion: I win, you lose, because I depend on actual data, while your argument depends on speculative data and "what if's".  True, I have the benefit of history on my side, but again, so do the anti-Marxists when they tell Marxists that communism does not work (and of course the Marxists attempt, unconvincingly, to state that Russia was not a true communist system).

 RL

RayLopez:

Notice none of the posters to date have refuted my points--which were backed by evidence.

You have made points in regards to 1. Say's Law and 2. The Money Illusion. When reading both forum threads from the side-line, as I have during the last few days, I can inform you that you have demonstrated one primary feature about yourself: You are completely inable to qualify your statements. Hence your so called "evidence" is not strict, but merely circumstantial. In regards to 1. it is clearly evident that you have failed to qualify which version of Say's Law you claim to have been refuted. Hence your evidence is circumstantial. In regards to 2. you have failed to qualify in which sense, and at which levels, you think The Money Illusion "works". Hence your evidence is circumstantial. You seem hell-bent on finding "evidence" and then rushing to construct particulars that is either refuted or proven by your evidence in accordance with your agenda. That's it for your evidence; what is more troublesome however is your statement that none have refuted your points to date. Fortunately for you no one ever will be able to refute your points until you qualify them, at which point your evidence might go from circumstantial to insubstantial or, to be fair, correct. At this moment you are nothing more than a firing instructor demanding everyone to hit bullseye on a blank sheet of paper! Mark it up, already!