Saturday, June 09, 2012

Quelle Merde

I will not be surprised if my translations are bad. Some Austrian fanboys brought up my name in comments on a blog in French:

"You would like me to say, where you can find the same criticism as put forward by Hazlitt? Well, not to my knowledge. Where Keynes Went Wrong, by Hunter Lewis mentions Hazlitt several times, but I haven’t read the book. (Minarchiste, he’s read it.)

About Hazlitt, I do not know of many critiques of his book. The only one that I know, and that seems to be frequently cited (at least, on my voyages on blogs in the U.S.) is that of Robert Vienneau. I am just going to read it. He (Vienneau) says that Hazlitt did not know anything of the theory that he defends, nor does he understand Keynes in his book containing his landmark criticism."

-- Meng Hu, 11 April 2012 at 20:41.
A thank you follows:

"(Thank you for your link to ’robertvienneau’)..."

-- Baraglioul, 11 April 2012 at 21:40.
An attempt at a substantial comment follows:

"As for me, I did not understand where Vienneau was coming from. When he says:

’Obviously, then, the equality of the wage and the marginal productivity of labor is not enough to determine either wages or employment. ’

He continues saying that the adjustment of wages to productivity does not determine employment or wages. I thought that as productivity increases, so does the wage, and that a wage higher than productivity leads to unemployment. Thus, he has a need to review the foundations, or he is intellectually dishonest.

Then, he continues:

’In neoclassical theory, this schedule "is the wage-rate that employers are willing to offer workers" at each level of employment within the possible range of levels. The "first postulate" can, at best, determine the schedule, but not the location at which the labor market is in equilibrium.’

Again, it seems to me that he has strayed completely. Hazlitt was entirely correct. The fact is that the first postulate (’The wage equals the marginal productivity of labor’) indicates precisely the spot where the labor market is in equilibrium. Why? Because as Hazlitt himself explains (and cited elsewhere by Vienneau, ironically) the increase in marginal productivity, in line with the wage rate, leads to the reduction in what Keynes calls the marginal disutility of work.

Finally, earlier he wrote:

’Keynes’ qualifications are obviously getting at imperfections of competition. For example, if the firm is a monopolist in the product market, the wage, when the firm is in equilibrium, is equal to the marginal value product of labor, not the value of the marginal product of labor.’

I wonder again at what he does not express. Why build his reasoning from a hypothesis of a monopoly situation? What monopoly? How? Why? In principle, markets (really free) lead to neither monopoly nor sustainable cartels. In fact, according to Keynesian logic, the market is always failing, and they base their reasoning on this failure, without at first explaining why or how it fails. ’The market fails because human nature is also’ unbalanced. In short, a dogma."

-- Meng Hu, 12 April 2012 at 00:25.

Another commenter tries to say something substantial:

"It seems to me that Hazlitt’s remarks actually present some weaknesses, but

  1. Keynes’ reasoning is even more fallacious
  2. Vienneau does not correctly identify Hazlitt’s weaknesses
  3. Vienneau supports a theory that is also erroneous
  4. Vienneau writes in bad faith, since, even if he were entirely correct on his point, it has no relevance to the extremely severe criticism that Hazlitt addresses to the General Theory.

Two small examples follow for ensuring that one is clear on the idea of the disutility of labor.

Example 1: If the best remuneration proposed to you is 10 euros per hour, and if you would prefer to do nothing rather than take the trouble to work for such a meager salary, your disutility of labor would exceed 10 euros.

Example 2: If someone offers you a wage rate of 100 euros per hour and they engage themselves to pay you for all the hours that you have done, without limitation, well, you are going to work more hours in a day ... In consequence, when the marginal utility of a gain of 100 euros becomes less than an hour of leisure, you stop working.

More observations:

  • In contrast to what Keynes says, the utility of the wage does not become equal but less than the disutility of work when a person decides to stop laboring.
  • The (marginal) disutility of work, in contrast to (marginal) productivity, depends on the volume of labor that has been provided by oneself, and not on the aggregate quantity of labor. I truly have the impression that Keynes, at certain moments, slips from one to the other. It seems to me that Vienneau is playing with the same sophistical fallacy, in particular when he writes that the amount of employment is fixed at the point where the utility of the marginal product balances the disutility of the marginal employment: he mixes up the idea of a volume of individual labor with another idea concerning the aggregate volume of labor.
  • In reality, this question rarely arises for employees since employment contracts do not permit the wage to be molded to how many hours one will provide for himself. For example, if you are considering an employment contract of 35 hours at 5,000 euros per month, to take or leave, all that one can say is that for you, the marginal utility of 5,000 euros is more than the marginal disutility of 35 hours of work.

That having been said, I believe, Hazlitt’s text presents three weaknesses.

On the one hand, his critique of Keynes is not severe enough. He writes, Disutility is here so broadly defined as to be almost meaningless. But Keynes’ definition cannot properly be said to be ’too large’. It is at best extremely misleading. (see the reference to the volume of labour actually employed).

On the other hand, although he is critical of the definition given by Keynes, he fails to state what is the correct definition.

Finally, at times, Hazlitt seems to totally deny that the disutility of labor plays a role in the marginalist theory (Yet it may be seriously questioned whether this ’second postulate’ is representative of any substantial body of thought, particularly in the complicated form that Keynes states it.)

In fact, one would say that this notion plays an essential role, but that that role is subordinate to that of the ’first postulate’, since the measure of disutility affects the [reservation?] demand for labor by employees, which is one of the factors considered in the ’first postulate’. The ’second postulate’ is somehow included in the first. Vienneau is correct to say that the ’second postulate’ plays a part, but he fails to specify that that role is already integrated in the ’first postulate’. He is thus formally wrong when he writes, Obviously, then, the equality of the wage and the marginal productivity of labor is not enough to determine either wages or employment."

-- Baraglioul, 12 April 2012 at 16:18.
Somewhere below, one of these commenters continues:

" ’(By the way, if you could provide references.)’

I know of no empirical study that has contradicted the Austrian theory [of the business cycle], but Vienneau has attempted a theoretical refutation, if you are interested.

’It is that most of these people, being economic professors at an university, are supposed to produce work regularly.’

I had a similar discussion on an old forum. Some tried to explain why the Austrians are so marginalized, where they suspected that the reason comes from the fact that when a school (here, the Austrian school) has nothing new to say, it stagnates and has reached its limits. Like you, I think that this is due to economists considering economics to be a science like other sciences, and not a human science. In science it is imperative to produce new research - this is a little myth of progress.

The article from Daniel Sanchez (which I had not known) is interesting. The passage that I especially concentrated on is:

’If economic data do not seem to demonstrate the playing out of a certain market process described by economic theory (assuming the theory is sound and the data are correct), that would indicate that circumstances must have been dominated by another market process (also described by pure economic theory), another set of factors, or the interplay of several market processes/sets of factors.

The economic historian uses data to determine which economic laws are most relevant in any given episode. If, for example, the economic historian discovers trustworthy data that show that after an increase in the supply of a certain good the price for that good increased, instead of falling, that would not testify against the law of supply. That would instead be an indication that other relevant factors are at work, like perhaps a precipitous drop in the supply of another good for which the first good can serve as a substitute.’

Human action is effectively very complex, never mechanical An earlier regularity cannot predict a subsequent regularity except under a hypothetical invariant uniformity that prevails in the succession of natural phenomena. This condition cannot exist. There is no regularity or constant relation in human action. It is in this sense that the author differentiates between an economist and an economic historian.

Certainly, the mainstream sees things differently, and what they call ’empirical studies’ is perhaps pretention that reduces free will to a giant equation and thus human action to a constant variable. Even a non-economist knows that such an equation does not exist. When certain Austrians have begun to use empiricism, it is perhaps an attempt to reconcile with the mainstream.

As for the fiscal stimulus, I found [via Mario Rizzo] this quotation from Keynes. This is troubling:

’Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle’"

-- Meng Hu, 14 April 2012 at 22:52
After many comments, one of the above fools writes:

"A little rude? He [Michael Brady] deserves it. How many times has he belittled the Austrians in his unreadable sentences with the words: ’ignorant’, ’idiot’, ’nonsensical’, ’absurd’, ’incompetent’, etc., etc. It is exactly like that other clown, as already shown, yes, Robert Vienneau, who when he devotes time to posting on the Austrians, in practically each sentence, you find adjectives like ’stupid’, ’scam’, etc. With these people here, I do not hold back.

I think that the myth that has developed among non-Austrians that Austrians never know mathematics is explained by the reluctance of the Austrians to use models to ’validate’ their theories. As I told you the other day, it is always the case that they are stuck in theory."

-- Meng Hu, 7 May 2012 at 15:51.

21 comments:

Meng Hu said...

"Quelle Merde"

Thank you for these kind words.
I deserved it, after all.

Unlearningecon said...

I think this is what happens when two bubbles clash. For me, arguments from the Austrians about Keynes' forward to the German version of TGT, his support for totalitarianism, his 'misreading' of Mises' book and comments on his understanding of German, have all been established to be poor arguments of little significance or interest. Daniel Kuehn and 'Lord Keynes' have responded to these points many times, and I did on one of Kuehn's posts.

Furthermore, that anyone would appeal to Hazlitt as an intellectual authority just strikes me as ridiculous. Hazlitt was a journalist with no real understanding of economics and devoted half his career to taking snipes at Keynes after his death, when he couldn't argue back.

If Hazlitt's critique was so great, why didn't it make a splash? Presumably some sort of statist conspiracy - either that, or Robert's comments on Hazlitt's lack of understanding of Keynes are clearly correct.

And Meng, to respond to your comments about my reading of The Failure- Vienneau's review is not all I've read. I read selected parts, but time is valuable commodity and it is simply not a good book. The entire 'paragraph by paragraph rebuttal' idea reminds me of David Graeber's characterisation of many Austrians:

"However, in the blogsphere, the quality or even intention of an argument often doesn’t matter. I have to assume Murphy was aware that all he had to do was to write something—anything really—and claim it rebutted me, and the piece would be instantly snatched up by a right-wing echo chamber, mirrored on half a dozen websites and that followers of those websites would then dutifully begin appearing across the web declaring to everyone willing to listen that my work had been rebutted."

I'm not prepared to read a book that is clearly so flawed, and one I wouldn't even know about if it weren't for the internet and its army of Austrian fanboys.

Unlearningecon said...

Correction: that should say "read a book *fully*"

Raoul said...

Robert Vienneau,

Do you plan to write another post, with some arguments, or do you intend to confine yourself to insults, sarcasms, and translation?

Raoul said...

Unlearningeco,

“I think this is what happens when two bubbles clash. For me, arguments from the Austrians about Keynes' forward to the German version of TGT, his support for totalitarianism, his 'misreading' of Mises' book and comments on his understanding of German, have all been established to be poor arguments of little significance or interest. Daniel Kuehn and 'Lord Keynes' have responded to these points many times, and I did on one of Kuehn's posts.”

I have read both Daniel Kuehn and 'Lord Keynes' responses on this point, and I have found them absolutely unconvincing. I’m ready to expose my arguments if you desire so. Nevertheless, I would emphasize (or, more exactly, emphasize again), that the issues you point out are not at all essential parts of Hazlitt’s book. Hazlitt repeatedly made comments about some ‘authoritarian’ words of Keynes, when he went through them, but it was only an incidental point, and he employed maybe half a page to the issue of the German preface. I have the feeling you try to do “as if” Hazlitt’s only argument was this one. If you actually do, it’s not correct.

“Furthermore, that anyone would appeal to Hazlitt as an intellectual authority just strikes me as ridiculous. Hazlitt was a journalist with no real understanding of economics and devoted half his career to taking snipes at Keynes after his death, when he couldn't argue back.”

Nobody, as far as I know, holds Hazlitt for an “intellectual authority”. I have already written it on Kuehn’s blog, so I don’t understand why you continue to pretend the contrary. Hazlitt’s book could have been written by a lot of economists, but only Hazlitt did so. It’s why anti-Keynesians refer to it.

Hazlitt’s profession is out of the issue. To say it once more, of course, he was not as good an economist as, for instance, Mises or Rothbard. But if he really is a so bad economist, you must be able to find substantial flaws in his book. To quote his professional occupation as an argument for his alleged incompetency is a shameful shortcut, and to say that Hazlitt had “no real understanding of economics” is a petitio principii.

All the Austrians think Keynes had “no real understanding of economics”. Nevertheless, because there are a lot of Keynesians, Austrians read the GT, in order to refuter it better. Since they are confident on their own theory, they are not frightened by such a reading. And I doubt lot of them raise Keynes’ ununderstanding” as a reason for not reading him.

Moreover, I have raised arguments against Robert Vienneau’s strictures, both on my blog and on Kuehn’s, and Vienneau has translated them on this post. Why don’t you refute them, instead of writing a generic attack against Hazlitt’s understanding?

In the same way, to reproach Hazlitt to have criticized Keynes after this later death is a very poor argument and doesn’t weaken the least his book. Do you think it’s no longer possible to criticize Rothbard since 1995?

Raoul said...

”If Hazlitt's critique was so great, why didn't it make a splash? Presumably some sort of statist conspiracy - either that, or Robert's comments on Hazlitt's lack of understanding of Keynes are clearly correct.

I’m sure even you don’t hold to this very “positivist” argument.
Hazlitt would be wrong because he is in the minority…

I add that Hazlitt’s book is not strong enough for convincing people who don’t read it. Now, Keynesians are just supplying a lot of arguments, not in order to criticize Hazlitt’s tenets, but in order to convince themselves they are not obliged to read it.

And Meng, to respond to your comments about my reading of The Failure- Vienneau's review is not all I've read. I read selected parts, but time is valuable commodity and it is simply not a good book.

So, if you really have read some parts of this book, you should have pointed out the flaws you found within, instead of just quoting Vienneau’ comment, which isn’t yours, and which deals only with the first pages of the first chapter.

On the other hand, you’re of course authorized no to read the books you don’t think good, but, at least, you must avoid to criticize them, or you must confine yourself to criticize the parts you have read.

I add than, given that a lot of Austrians like this book, it could be a good investment to take the time to read it: you could refute many Austrians at once.

The entire 'paragraph by paragraph rebuttal' idea reminds me of David Graeber's characterisation of many Austrians:

"However, in the blogsphere, the quality or even intention of an argument often doesn’t matter. I have to assume Murphy was aware that all he had to do was to write something—anything really—and claim it rebutted me, and the piece would be instantly snatched up by a right-wing echo chamber, mirrored on half a dozen websites and that followers of those websites would then dutifully begin appearing across the web declaring to everyone willing to listen that my work had been rebutted.
"

It’s funny, I could exactly reverse the criticism. Graeber complains that Internet Austrians believe Murphy on his word when Murphy says he has refuted him; but you seem to believe Graeber on his word when he says Murphy’s refutations are unbelievable. It’s only a generic criticism. Moreover, to be constantly politically characterizing one’s adversaries (“right-wing”) is a little bit boring.

I'm not prepared to read a book that is clearly so flawed, and one I wouldn't even know about if it weren't for the internet and its army of Austrian fanboys.

“so flawed”: petitio principii.
“Austrian fanboys”: Vienneau’s imitation and bad controversial manner.

Meng Hu said...

Unlearning,

You underestimate Hazlitt because you know nothing about his work. He completely demolished Keynes' GT. See for example, (TFotNE, p. 90-91) :

« Keynes argues at times, as we have seen, that saving and investment are not only always equal but "merely different aspects o£ the same thing." Yet he still keeps to his old habit of deploring saving while approving investment. So he must argue that saving reduces income and investment increases income — though "they are necessarily equal in amount," and "merely different aspects of the same thing" (p. 74)!

In sum, we are apparently to understand that while saving and investment are "necessarily equal" and "merely different aspects of the same thing," yet saving reduces employment and incomes and investment increases employment and incomes!

There is still another Keynesian paradox of savings (though they are ''necessarily equal" to investment and "merely different aspects o£ the same thing"):

Though an individual whose transactions are small in relation to the market can safely neglect the fact that demand is not a one-sided transaction, it makes nonsense to neglect it when we come to aggregate demand. This is the vital difference between the theory of the economic behavior of the aggregate and the theory of the behavior of the individual unit, in which we assume that changes in the individual's own demand do not affect his income (p. 85).

The only way in which we can make any sense whatever of this whole otherwise baffling passage is to assume that when Keynes uses the word "saving" he is thinking merely of the negative act of not buying consumption goods; but when he uses the word "investment" he is thinking merely of the positive act of buying capital goods. And he falls into this primary error because he forgets his own previous insistence that "saving" and "investment" are "necessarily equal" and "merely different aspects of the same thing." He is, in fact, thinking in each case of only one side of the transaction: "Saving" equals merely the negative act of not buying consumption goods; "investment" equals merely the positive act of buying or making capital goods. Yet these two acts are both parts of the same act!
The first is necessary for the second. An analagous thing happens in the realm of consumption goods alone. A man's tastes change, and he switches from chicken to lamb. We don't scold him at one moment for hurting the poultry raisers and praise him at the next for aiding the sheep raisers. We recognize that his purchasing power has gone in one direction rather than another, and that if he had not given up the chicken he would not have had the money to buy the lamb. Unless a man refrains from spending all his money on consumption goods (i.e., unless he saves), he will not have the funds to buy investment goods, or to lend to others to buy investment goods. »

Meng Hu said...

To tell you the truth, Keynes' writing is atrocious; he is tangled in contradictions of "saving" and "investment". Trust me, there is more : see pages 137 and 232 of Hazlitt's TFotNE.

And here's what I found when I re-read Keynes' book (chapter 3, GT) :

« 4. An entrepreneur, who has to reach a practical decision as to his scale of production, does not, of course, entertain a single undoubting expectation of what the sale-proceeds of a given output will be, but several hypothetical expectations held with varying degrees of probability and definiteness. By his expectation of proceeds I mean, therefore, that expectation of proceeds which, if it were held with certainty, would lead to the same behaviour as does the bundle of vague and more various possibilities which actually makes up his state of expectation when he reaches his decision. »

The problem is as follows : there is no need to make previsions in the absence of uncertainty. So, there is no such thing as "undoubting expectation". Austrians know that very well. The irony is that keynesians sometimes blame austrians for knowing nothing about uncertainty.

About the 2nd chapter of Keynes' GT, see also Villacampa.
http://mises.org/journals/scholar/villacampa2.pdf

P.S. I am interested about the other reviews you indicated. Can you give me some links ?

Unlearningecon said...

Rauol:

My initial comments were not directed at Hazlitt but moreso to the general recent exchange about Keynes. I have responded to your comments on Keynes & totalitarianism over on Daniel Kuehn's post from a short while ago, so I'll confine that discussion to there and Hazlitt to here.

Briefly on Murphy: no, I examined the arguments. Graeber has documented pretty extensively that spot barter did not lead to money as economists believe. Murphy responded by suggesting that it *could* have, even if it isn't documented. Hmm. Anyway, onto Hazlitt.

I find the book, and his writing, irritating. He spend a lot of time taking snipes at Keynes' wording - questioning the use of certain adjectives, the term 'liquidity preference' and other 'unnecessary' qualifications. It's ironic he does this because it is quite unnecessary to his critique and only serves to make it less concise, and to seem more like a blunderbuss attack then a carefully considered refutation.

As for substance: I've read Hazlitt's opening, ending & the chapters on wages, Say's Law & liquidity preference, as these are, I'm sure you'll agree, some of the most important parts. I'll focus on LP:

Hazlitt seems more concerned with being condescending than actually engaging Keynes' arguments:

"The economic system is not a Sunday school; its primary function is not to hand out rewards and punishments."

What? Keynes' use of the word 'reward' is irrelevant in this case; he's merely saying that interest is an incentive to get people to part with liquidity. Hazlitt is latching onto something quite meaningless here. Let's continue:

""If you wish to sell me tomatoes, for example, you will have to offer them at a sufficiently low price to "reward" me for "parting with liquidity"—that is, parting with
cash. Thus the price of tomatoes would have to be explained as the amount necessary to overcome the buyer's "liquidity-preference" or "cash preference.""

Seriously? Exchanging money for goods and services is different to putting it in a bank just to make more money.

Keynes is obviously saying that cash has a role as a store of value as well as a medium of exchange. If it is not currently being used for the latter then it will be stored; this is where LP comes into play.

Hazlitt makes some very odd arguments and quite clearly doesn't really 'get' Keynes. Maybe he makes some hits, somewhere in the book. But I can't be expected to read a 450 page book that offers that level of argumentation.

Unlearningecon said...

Robert,

I get the impression you are planning to do a follow up post on this. Is this the case - if not, I will do one; if so, I will not?

Robert Vienneau said...
This comment has been removed by the author.
Robert Vienneau said...

I don't plan on a follow up post.

Before one can analyze an argument, one must be able to accurately echo it. Neither Hazlitt nor some of the above can do that.

Unlearningecon said...

In that case, I will offer some follow up comments regarding Meng & Raoul's comments:

Meng: "As for me, I did not understand where Vienneau was coming from. When he says:

’Obviously, then, the equality of the wage and the marginal productivity of labor is not enough to determine either wages or employment. ’"

Vienneau is highlighting Hazlitt's confusion between schedules and equilibria, and Hazlitt's apparent denial that a supply schedule for labour plays any role in determining employment (something highlighted by another commenter, Raoul, later on). Clearly, we must not only know the marginal productivity of labour, but the amount of hours worked, too, in order to know the level of wages and employment (at least according to marginalist theory).

"Because as Hazlitt himself explains (and cited elsewhere by Vienneau, ironically) the increase in marginal productivity, in line with the wage rate, leads to the reduction in what Keynes calls the marginal disutility of work."

You are correct to note that there are conflicting effects in the marginalist model of employment, but these are not generally addressed by it and serve no relevance to Keynes' words here, which are merely a description. Keynes actually notes exactly these interactions during chapter 2.

The last part of your comment strays somewhat and contains assertions about the 'free market' that I'm not going to get into. However, you do not effectively show that Keynes' notes about the effects of imperfections in competition are wrong or irrelevant, or show that Hazlitt has managed to understand Keynes on this point.

Raoul: Your first bullet point is a minor niggle about the precise point at which work is traded off for leisure, and does not serve to undermine any of Keynes' work. Neither does your last point, which correctly notes that wage contracts are 'lumpy' in the real world and do not reflect the marginalist concept of workers freely trading off work for leisure. Again, this does not concern us when we are simply describing the theory.

However, your middle bullet point is of some interest:

"The (marginal) disutility of work, in contrast to (marginal) productivity, depends on the volume of labor that has been provided by oneself, and not on the aggregate quantity of labor. I truly have the impression that Keynes, at certain moments, slips from one to the other. It seems to me that Vienneau is playing with the same sophistical fallacy, in particular when he writes that the amount of employment is fixed at the point where the utility of the marginal product balances the disutility of the marginal employment: he mixes up the idea of a volume of individual labor with another idea concerning the aggregate volume of labor."

If this is a problem, it is a problem with marginalist analysis, which uses the same method for analysing the labour market at the level of the individual, the firm/industry, and the economy. The point of Keynes' book is to expose this as a problem.

Raoul said...

Unlearningecon,

”I have responded to your comments on Keynes & totalitarianism over on Daniel Kuehn's post from a short while ago, so I'll confine that discussion to there and Hazlitt to here.

It suits me. I will answer you over there.

“I find the book, and his writing, irritating.”

Every non-Keynesian find the GT, and Keynes’ writing, irritating (and particularly confused). I quoted the Keynesian definition of voluntary unemployment at Kuehn’s. It really looks as if Keynes wanted to be unclear, and it was only one example among many others. On the contrary, Hazlitt’s writing is almost unanimously held for very good. But that’s not really the heart of the matter.

“He spend a lot of time taking snipes at Keynes' wording - questioning the use of certain adjectives, the term 'liquidity preference' and other 'unnecessary' qualifications.”

Indeed, Hazlitt repeatedly emphasizes the badness of Keynes’ writing. But, firstly, Keynes does exactly the same, in the GT, about his forerunners. Secondly, Keynes worsens the obscurity of the older economists, whereas Hazlitt often throws a lot of light on Keynes’ writings.

As a rule, Keynes is constantly putting unnecessary words and parenthetical clauses in his sentences. It’s not a very scientific attitude. (BTW, in my opinion, it’s very likely Marcel Proust draws his inspiration from Keynes to create the ridiculous character of M. de Norpois: both have the same pretentious language, the same false reputation to be a good stockbroker, both are hypocrite, both hang to the power, both are connected with economist Leroy-Beaulieu, and---it’s my point here---both speak (or write) exactly in the same obscure way.)

I find Hazlitt’s criticisms against the term “liquidity preference” particularly justified. Keynes should have spoken of “liquidity (or cash) UTILITY”. The cash has a subjective utility, and the actor has to weigh this utility against its opportunity cost, for instance, the non-payment of interest. But “preference” implies an idea of “absolute” and actually the so-called “preference” is only “relative”. You cannot know before the choice is made whether the “preference” goes to the liquidity or to the interest.

As Hazlitt rightly put it:” If I wish to hold cash rather than invest it at the moment, this may of course be called cash preference or liquidity-preference. But preference over what? If I am offered $20,000 for my house and turn the offer down, this could be described in Keynesian language as house-preference. But if I am offered $21,000 and take it, this would have to be called liquidity preference. Yet it is merely the preference of $21,000 over $20,000. It is a little hard to see what advantage this Keynesian phrase has over orthodox economic terms.”

It’s likely Keynes was seeking a term resembling to “time preference”. The difficulty is “time preference” is a real preference; i.e., it’s an absolutely true praxeological fact, derived by logic from the axiom of action, whereas “LP” isn’t.

Raoul said...

“I'll focus on LP:
Hazlitt seems more concerned with being condescending than actually engaging Keynes' arguments: "The economic system is not a Sunday school; its primary function is not to hand out rewards and punishments."”


You isolate an incidental remark and, on this only basis, you pretend that Hazlitt seems to refuse from “engaging Keynes’ arguments” and that he is “condescending”. It’s too easy.

If you want to see somebody who really refuses to grapple with his opponents’ arguments, just see, in the chapter XIV of the GT, Keynes to give his marvelous refutation to Wicksell’s and Böhm-Bawerk theory of interest: “"The wild duck has dived down to the bottom —as deep as she can get—and bitten fast hold of the weed and tangle and all the rubbish that is down there, and it would need an extraordinarily clever dog to dive after and fish her up again". Alternatively, you could also re-read Vienneau’s article.

The criticism of Hazlitt against the word “reward” is justified as well (albeit it’s not at all the core of his critique). In an economy of voluntary exchange, of mutual services, there’s no room for a “reward”. People pay interest because they benefit from the funds borrowed. The economics-of-rewards belongs only to the state paternalism dreamt by Keynes, to an economy where bureaucrats arbitrarily decide how much each individual is entitled to gain.

Let's continue: ""If you wish to sell me tomatoes, for example, you will have to offer them at a sufficiently low price to "reward" me for "parting with liquidity"—that is, parting with cash. Thus the price of tomatoes would have to be explained as the amount necessary to overcome the buyer's "liquidity-preference" or "cash preference.""
Seriously? Exchanging money for goods and services is different to putting it in a bank just to make more money.”


Hazlitt points out that there is a very grave flaw in Keynes reasoning and definition. Indeed, Keynes defines the interest rate as the “reward of parting with liquidity”. Now, Hazlitt shows that this definition may apply to any monetary exchange! It’s a terrible defect! How could you explain the specific phenomenon of interest with a reasoning which could concern any market price? The fact that there are some differences between to exchange money for goods and to put money in a bank is completely immaterial regarding this issue.

Raoul said...

The latter was one of the three main criticisms of Hazlitt against the LP theory. The two other, that you didn’t quote, are the following:

1°Liquity/interest is a false dichotomy. With some Tresor bonds and with some bank deposits, you can have both. (I know Keynes wrote a footnote regarding a related issue, but in my opinion it doesn’t dispel the contradiction).

“If Keynes's theory were right, then short-term interest rates would be highest precisely at the bottom of a depression, because they would have to be especially high then to overcome the individual's reluctance to part with cash—to "reward" him for "parting with liquidity." But it is precisely in a depression, when everything is dragging bottom, that short-term interest rates are lowest. And if Keynes's liquidity-preference were right, short-term interest rates would be lowest in a recovery and at the peak of a boom, because confidence would be highest then, everybody would be wishing to invest in "things" rather than in money, and liquidity or cash preference would be so low that only a very small "reward" would be necessary to overcome it. But it is precisely in a recovery and at the peak of a boom that short-term interest rates are highest.4”

Actually, the reproach I have against Hazlitt’s analysis is that it is not critical enough. But Hazlitt couldn’t go further because he didn’t believe in the pure time preference theory and because he didn’t understand that the phenomenon of interest exists outside of the loan market.

”Hazlitt makes some very odd arguments and quite clearly doesn't really 'get' Keynes.”

The so recurrent use of “to get” regarding Keynes is somehow irrational. It’s the automatic answer of the Keynesians. Yet, it is clearly not fitted. It sounds as if some general meaning was floating over the chapters of the GT, a general meaning that only some initiates could satisfactorily grasp. But it doesn’t work like that. The GT is an essay, not a symbolic novel. If (and in so far as) Hazlitt’s chapter-by-chapter analysis is correct, his general understanding of the GT must be correct.

As for substance: I've read Hazlitt's opening, ending & the chapters on wages, Say's Law & liquidity preference, as these are, I'm sure you'll agree, some of the most important parts.

I would be very interested in your opinion on the chapters on wages. And I would like to know if you agree with these words of Keynes: “The first [postulate] gives us the demand schedule for employment; the second gives us the supply schedule; and the amount of employment is fixed at the point where the utility of the marginal product balances the disutility of the marginal employment". Hazlitt criticized them, Vienneau criticized Hazlitt’s criticism and I criticized Vienneau’s criticism (see the post).

I would also be interested in your opinion about the chapter V of The Failure, where Hazlitt applies to Keynes’ theory of the “labor units” the analysis of Böhm-Bawerk about the labor value.

Unlearningecon said...

Robert: I thought I left another post, responding to Meng & Raoul's points. Am I mistaken or did you remove it for some reason?

Raoul:

I will ignore discussions over Keynes' wording. I find his rhetorical flourishes a joy to read and Hazlitt's smug self assurance irritating; you see it differently. No matter.

You, like Hazlitt, have clearly failed to grasp Keynes' point. Money has several uses, two of which are as a medium of exchange and as a store of value. Hazlitt confuses the two, when Keynes is only arguing that liquidity preference applies when money is used as a store of value. At the point of exchange liquidity preference is no longer a consideration.

Hazlitt's points about interest rates being procyclical are not sufficient to blow a hole in the LP theory of interest. LP is not the only factor determining the interest rate; in a boom demand rises and this pushes up interest rates; the latter happens in a depression. This is entirely compatible with Keynes' economics.

Robert Vienneau said...

Blogger automatically identified your comment as spam for some reason. I have restored it.

Meng Hu said...

Unlearning,

"Seriously? Exchanging money for goods and services is different to putting it in a bank just to make more money."

You call this ... "argument" ? One of the problems with Keynes is that he constantly failed to recognize that the rate of interest is a market phenomenon. Read this. I take some of my time to make this post. So you can take some of your time to read the entire post, even if it is quite long, I admit.
http://mises.org/Community/forums/p/29610/474744.aspx

I'm actually rereading Keynes' GT, as Raoul does. I will complete my post later in the Mises forum (It may take some time, because I've had several article to post in my IQ-blog. I have only two arms). Maybe Raoul will add some comments.

Regarding the liquidity preference, see de Soto's book, page 550 (footnote 63), page 562 (footnote 77).

Unlearningecon said...

I direct everyone's attention to my follow up post on the subject:

http://unlearningeconomics.wordpress.com/2012/06/16/zombie-criticisms-of-keynes/

Meng Hu said...

I left a comment in your blog, Unlearning. It does not appear. Check your spam box. I copy-paste here.

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I note how you did not address this post.
http://mises.org/Community/forums/p/29610/474744.aspx
Even worse, you totally ignore Raoul's comment.

And this : "Regarding the liquidity preference, see de Soto's book, page 550 (footnote 63), page 562 (footnote 77)."

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