Re: Backed Money-Sproul/Tomasson re. Ricardo/Bentham

["Gunnar Tomasson" <tomasson@xxxxxxxx>]

Title: Re: Backed Money-Sproul/Tomasson re. Ricardo/Bentham

Ted:

 

Thanks for your comments.

 

Of course, Keynes was at his pugnacious best (worst?) when he wrote of Hayek's 'Prices and Production':

 

"The book, as it stands, seems to me to be one of the most frightful muddles I have ever read, with scarcely a sound proposition in it beginning with page 45, and yet it remains a book of some interest which is likely to leave its mark on the mind of the reader.  It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in Bedlam."  (XII, p. 252)

While this was his "pay-back" for Hayek's review of the 'Treatise', Keynes DID concede in a private letter to Harrod (?), which I read some twenty years ago that there was some merit in Hayek's criticism itself. 

 

As for the point at issue, namely, the place - if any - of logical coherence in the mental apparatus or theoretical "glasses" through which economists observe actual economic developments, it strikes me as self-evident that economic science is not exempt from the epistemological point which Einstein made with respect to "science" in general as follows:

 

"Science without epistemology is - insofar as it is thinkable at all - primitive and muddled."

 

Indeed, in his last paper on the beloved subject ('The Balance of Payments of the United States'), which was published posthumously in the Economic Journal, Keynes himself took a Hayek-like stance and condemned contemporary trends in mainstream economic thought as "much modernist stuff, gone wrong and turned sour and silly".

 

In this respect, I would not regard the mind-sets of economists - castigated by Solow in his AEA Presidential Address - who deny the existence of "involuntary" unemployment in the real world, as evidence AGAINST the importance of logical coherence and clarity in theoretical economics.   They are sour and silly to a man!

 

As for the alternative approach - that of logical coherence and clarity with respect to first principles - let me note two cases twenty years apart which exemplify the point I wished to make.

 

First.  In December 1976, certain BIS data on external indebtedness of IMF member countries crossed my desk at the IMF.  Within a day or two, I had prepared a 2-3 page memorandum on the subject matter whose conclusions were summarized as follows:

 

"In brief, the high level of commercial bank loans outstanding on account of [the] major debtors gives rise to concern.  In the period immediately ahead, any moderation of the recent rate of increase in commercial bank borrowing by these countries would make more difficult the task of ensuring sustained economic recovery among the industrial countries.

 

"In the somewhat longer term, possible repayment difficulties of the major debtors and the countries of Eastern Europe could prove damaging to the international financial system."

 

The day that my memo landed on his desk, my boss had lunch with a Senior Vice President of Citibank and raised with him my concerns.  "Gunnar, you're all wet!" my boss reported on return from lunch.  A few years later, Citibank wrote of some $3 billion of Third World Debt and the VP retired.

 

In this instance, the back-of-an-envelope calculations of an IMF economist with a classical monetary-theory bent out-performed whatever econometric models and computer forecasts that guided Citibank in what, in retrospect, proved to be a costly case of "primitive and muddled" economists failing to look out for certain obvious things that do not register on the intellectual radar screens of mainstream economists.

 

Second.  On December 7, 1996, I addressed related issues in a letter to Fed Governor Laurence Meyer.  The letter read in relevant part as follows:

 

"...The Washington Post reported that the Mexican Peso Crisis at end-1994 surprised "nearly 50 U.S. intelligence analysts, Wall Street financiers and academic experts [who had] gathered at the State Department" one week earlier for an in-depth analysis of Mexico's economic and financial prospects.

 

"This time the International Institute of Finance joined the IMF and the Federal Reserve in staff and macro-economic forecasting failure to match the back-of-the-envelope analysis of Third World Debt prospects which I did in 1976 on the basis of nothing more than common sense and classical monetary thought.

 

"'It is difficult to know just how close we were to a global crisis," The Washington Post (Feb. 2, 1995) quoted Mr. Charles Dallara, Director of the International Institute of Finance.  As former senior Treasury official and IMF Executive Director, Dallara is an acknowledged expert in international finance.

 

"From the vantage point of classical monetary thought, it is certain that the world monetary system has been undergoing structural disintegration for the past quarter-century.  The only uncertain aspect thereof is when, where, and how policy-makers will recognize that this process constitutes a "global crisis."

 

"The ultimate cause of this "global crisis" is the combination of lax monetary control and high interest rates, which have characterized national and international monetary developments since the Bretton Woods system collapsed in the early 1970s, while the proximate cause of its unraveling remains to be seen.

 

"Now, after quarter-century of sustained growth of monetary and other financial instruments, the ratio of paper wealth to output of goods and services has long since become dangerously high as manifested, inter alia, in Third World debt. the S&L morass, rising public debt and commercial bank portfolio problems.

 

"In this respect, Deputy Treasury Secretary Lawrence Summers advised The Washington Post last week that he judged the U.S. economic outlook to be now better than at any time since the 1970s.  Other signs, such as the recent rapid economic slow-down in Asia, suggest that this may be the lull before the storm.

 

"It is fair surmise that macro-economic forecasting models predicated on mainstream monetary thought, which have detected no signs of "a global crisis" during the rapid rise in the ratio of paper wealth to real output during the past quarter century, are once again setting policy-makers up for a nasty "surprise"."

 

This was some six months plus before the financial, economic, and social collapse of Indonesia and other erstwhile Asian "tiger" economies caught everyone by "surprise".

 

And what is the moral of the story?

 

Briefly, the mind-sets of economists at the IMF, the U.S. Treasury, the Fed and in academe are not equipped to look for and identify financial trends that, whatever their short-run effects, may bring disaster in the long run. 

 

Gunnar

 

 

 

----- Original Message -----

From: Ted Winslow

To: POST-KEYNESIAN THOUGHT

Sent: Sunday, March 19, 2000 8:14 PM

Subject: Re: Backed Money-Sproul/Tomasson re. Ricardo/Bentham

Gunnar quotes Keynes:
>
> "I found it very interesting and really have next to nothing to say by way
> of criticism. From one point of view you are perhaps scarcely fair to the
> classical view. For what you are giving is a representative belief of a
> period when economists had slipped away from the pure classical doctrine
> without knowing it and were in a much more confused state of mind than their
> predecessors had been. The story that you give is a very good account of the
> beliefs which, let us say, you and I used to hold. But if you were to go
> further back, how far back I am not sure, you would have found a school of
> thought which would have considered this an inconsistent hotch-potch." [54]
>

>
> "The inconsistency creeps in, I suggest, as soon as it comes to be generally
> agreed that the increase in the quantity of money is capable of increasing
> employment. A strictly brought up classical economist would not, I should
> say, admit that. We used formerly to admit it without realizing how
> inconsistent it was with our other premises." [56]

He then interprets these passages as follows:

>
> In other words, Keynes was guilty of the much maligned Ricardian "vice," as
> it came to be called:
>
> The intellectual aversion to indeterminate, i.e., inconsistent, propositions
> parading under the banner of economic science.
>

The Ricardian "vice", according to Keynes, is not "the intellectual aversion to indeterminate, i.e., inconsistent, propositions parading under the banner of economic science."  It is the overemphasis on deduction (i.e. on formal logic) and the mistaken identification of formal logic with ontological atomism.  

The overemphasis on deduction produces what Emerson called a "foolish consistency".  One of the most important signs of its presence is a psychologically based immunity to reductio ad absurdum arguments.  Say a particular set of premises leads to the conclusion that there can never be involuntary unemployment.  Economists wedded to "foolish consistency" respond by denying the obvious fact of involuntary unemployment.  Say they also imply the neutrality of money.  Here the response is to deny the obvious fact that changes in the money supply are capable of changing output.

The rational response to a reductio ad absurdum is to conclude that the premises of the argument are in some way mistaken and then to change them so as eliminate the absurdity.  A second-best though less than wholly rational response (better, however, than remaining wholly immune to the reductio ad absurdum) is to change the conclusions without changing the premises.  Those who do this, of course, mistakenly remain satisfied with an ultimate inconsistency.  

(Frank Ramsey, by the way, provides a philosophical defense of inconsistency as better than "foolish consistency" in his discussion of the relation of "human logic or the logic of truth" to "formal logic" in the essay "Truth and Probability" in The Foundations of Mathematics.

"The most generally accepted parts of logic, namely, formal logic, mathematics and the calculus of probabilities, are all concerned simply to ensure that our beliefs are not self-contradictory.  ...  But this is obviously not enough; we want our beliefs to be consistent not merely with one another but also with the facts: nor is it clear that consistency is always advantageous; it may well be better to be sometimes right than never right.  This point seems to me to show particularly clearly that human logic or the logic of truth, which tells men how they should think, is not merely independent of but sometimes actually incompatible with formal logic."   p. 191)

The idea of the "foolish consistency" of the "remorseless logician" is frequently invoked by Keynes to describe the mentality of "classical theorists".

"The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight - as the only remedy for the unfortunate collisions which are occurring.  Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry.  Something similar is required to-day in economics."  (VII, p. 16)

What "Bedlamite economists" (Keynes's phrase) and many others seem to have the greatest difficulty accepting is the psychological fact of avarice, of  "the love money as a possession".  One consequence of this, according to Keynes, is a very strong irrationally rooted attachment to Say's law.

"The absurd, though almost universal, idea that an act of individual saving is just as good for effective demand as an act of individual consumption, has been fostered by the fallacy, much more specious than the conclusion derived from it, that an increased desire to hold wealth, being much the same thing as an increased desire to hold investments, provide a stimulus to their production; so that current investment is promoted by individual saving to the same extent as present consumption is diminished.
 "It is of this fallacy that it is most difficult to disabuse men's minds."  (VII, pp. 211-2)

"Contemporary thought is still deeply steeped in the notion that if people do not spend their money in one way they will spend it in another.  Post-war economists seldom, indeed, succeed in maintaining this standpoint consistently; for their thought to-day is too much permeated with the contrary tendency and with facts of experience too obviously inconsistent with their former view.  But they have not drawn sufficiently far-reaching consequences; and have not revised their fundamental theory."  (VII, p. 20)

In a footnote to the second sentence in this last passage Keynes singles out Robbins as an exception to this and, hence, as exemplifying "foolish consistency".

"It is the distinction of Prof. Robbins that he, almost alone, continues to maintain a consistent scheme of thought, his practical recommendations belonging to the same system as his theory."  (p. 20, note 2)

Keynes frequently picks out Robbins and Hayek as exemplifying "foolish consistency" in this sense.  In the case of Hayek, for instance, Keynes says of Hayek's book  Prices and Production that

"The book, as it stands, seems to me to be one of the most frightful muddles I have ever read, with scarcely a sound proposition in it beginning with page 45, and yet it remains a book of some interest which is likely to leave its mark on the mind of the reader.  It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in Bedlam."  (XII, p. 252)

Best,

Ted