The Essence of Keynesian Economics: A Critique

0:00I'd like to thank you for attending my talk and I've changed slightly the title of my paper, which is Essentials of the Keynesian System, Erasmanyan Critique. So, Erasmanyan, I'd like to explain that my main arguments will be along the work of George Reisman First things, the principal objectives of the paper explain the continuing influence and appeal of the Keynesian system despite the well-documented absurdity of its theoretical substance as well as policy recommendations.

0:52So we still have this very important strong impact of Keynesianism on everything, on academy and also on the policy, on the actual economic policy. And my hypothesis is that the critics were not able to identify the most crucial mistakes in the Keynesian system and that the actual content of the critics' positive economics was for the most part, even it was in line with the Keynesian system itself. So, for example, the monetaries and the rational expectations theorists are Keynesians, are Keynesians in substance for the most part. So, if you take the fundamentals in the analytical system, and the Keynesian system itself is neoclassical.

2:09So the Keynesian system has roots in neoclassicism. So Keynes' teacher was Alfred Marshall, and he also took a lot from Fisher. So if you think about the theory of profit and interest, So, Keynes' theory was in large part neoclassical. So, his marginal efficiency of capital, for example, is entirely neoclassical. Although he added something to this body of theory, like with his liquidity preference theory of interest, but the fundamentals were still neoclassicals.

2:54In the paper I present George Riesman's critique of Keynesianism, which is in his book Capitalism, In Chapter 18, his critique, in my opinion, is very much original. It's apart from everything we knew, even in the Austrian school, so I would very much like to urge you to read his critique very carefully, so it will introduce you, among others, to his contributions to the positive economics.

3:52Like I said, the monetarists and others share important elements in their system with Keynesians. And the point is that if you have a very big theoretical case for your ideology, like free market, Market and you will fail eventually because your convictions will remain just articles of faith and then a case in point is on Greenspan of course so he was a yeah and a very well known advocate of laissez-faire economics he was even in Arendt's circle but he later If you don't have a strong theoretical case, then if there are some facts that you cannot explain with your theory, then you will eventually abandon your ideological convictions, because everything depends on theory.

5:11In this talk, I just outlined the main objectives of the paper. In this talk, I will just talk about one thing, one main contradiction, because I don't have much time, so I can spend a lot of time refuting many absurdities which are to be found in the engine system. But one One thing which jumps into you is that there is a major contradiction of the 2 plus 2 equals 5 type. So, if we can identify in any theoretical system these kinds of contradictions, then we will build a very strong case against it. So, in other words, if somebody says A is If it's not A, then we can dismiss the theory and everything which falls from it, so this is my main objective in this talk, to identify one important element, one fundamental element in the Keynesian system, where I can say it obviously contradicts the law of identity, which is A is A.

6:33Well known iron rents, XCM, developed by iron rents mainly. So obviously a very detailed critique of the Keynesian system is very important, but since I cannot give it in this talk, it will then be up to further papers and like I indicated I will concentrate on the income expenditure model, which is a very specific understanding of the process of income formation and I will also add use.

7:31So it also provides the foundation for the Overseeing Under-Investment Doctrine and the line is well known. It starts with Malthus, Don Hobson and Kane so we have a discontinuity because there is The income expenditure model can be summed up as a theory that explains why savings do not equal investment, why there is our saving and under investment.

8:19This is the view, this is the main argument of Malthus, Hobson and Keynes line. So if we can say that the specific statement of this problem, I mean the problem is that this statement gets the essence of the actual market process wrong. So I'd like to refute the proposition that the macroeconomic problem is to equate saving and investments. But let's get into the details.

9:06So the importance of the income expenditure model. Some may say Keynesianism is almost dead even in the terms of theoretical economics. But still its essence is there. And Mark Block asked Paul Samuelson about the essence. What is the essence? And the essence, like I already mentioned, is that it's the method of analysis which looks for the balance between propensity to save at full employment and the factors making for the propensity to invest. So this is the well-known income expenditure model.

9:52So we have this circular flow of macroeconomic activity. There are three factors of production, let's say, and then they reduce the final output and they receive also income in terms of wages, rents, and interest, and they spend their their money and that way they keep the economy going. Specifically, their incomes spent on the goods also are used as payments for facts like the demand for labor stems also from the consumption spending of the consumers. So there is this direct link between consumption spending and demand for labor, for example, and demand for capital goods.

10:46Okay, these are the main features of the income expenditure model. So we have the income, real income, and also the nominal income from the production and Spending Process in sequence, and then the incomes that people get or the owners of the factors get, this income can either be spent on consumers' goods or invested, or saved and invested. But the important thing is here that both spending categories are sources of funds for the demand for factors by business.

11:38And in this model, net saving and net investment, which is under I, it provides only the funds to accumulate additional and new capital. If you want to keep the economy, to not have the additional accumulation of capital, if everybody just consumed, we would not have any additional capital. The consumer spending would maintain the existing capital structure and it would also provide Why the demand for labor and for capital goods? And this is the problem here that I refer to as being a contradiction of the law of identity.

12:33John Stuart Mill in the 19th century has this very important in my mind proposition which is demand for commodities is not demand for labor. And this proposition goes directly against this whole income expenditure model. It says that consumers, when they demand consumers, because they don't pay workers, they don't provide the funds for the demand for capital goods, so they just do the spending. So let's assume we had a 100% consumption spending out of, we have sales revenues by business and these sales revenues were spent by both workers and the businessmen capitalists on the consumption goods.

13:29So in that case we wouldn't have any funds to demand labor and capital goods. So there is this very important point here that if somebody demands consumer goods or buys consumer goods, he doesn't create a demand for labor or capital goods. These demands are separate. And in most parts also in direct conflict with... I mean, you can either spend for labor or for consumer goods, for example. So this is a consumer-centered view which places the consumer and his spending and says that it drives the economy. But actually we have... our economy must be understood from the business-centered point of view.

14:31So this is how I think we must cast the structure of spending, of different kinds of spending in the market economy. So unfortunately I cannot explain very in any detail right now. So if you're interested, just email me and I will send you the paper which explains this whole idea. So I know that it's very difficult to explain very clearly the ideas which may appear somewhat strange, but I just want you to contemplate the Mises preposition and to think about it and if you're interested further, then look at George Riesman's website and read his chapter 18 and then if you're interested in this picture and then how it relates to a better explanation of how the economic system works and functions And I would like, I mean, I would love to send you the paper and also the explanations of this particular model.

15:56So this is a model which can also be used in the explanation of how profits are determined. So it's, yeah, it's based on George Schisman's work. So I think time is up, right? And I'd like to thank you.