“Keynesian” Myths and Misunderstandings

As an entrepreneur and capitalist, I read this critique of “Keynesianism” by John Mauldin with great interest.   John is a tremendous macro market thinker and someone who I’ve learned a lot from over the years.  In fact, few people have done more to bring macro views to the masses over the last ten years.  He deserves a lot of credit for that.  But I am afraid I disagree with substantial parts of the article he wrote this weekend.  In fact, I think pieces of it are based on important fundamental misunderstandings of the way our monetary system is designed and functions.

First of all, people should be careful with the term “Keynesian” (Wikipedia is not a great source, by the way).  It has developed a pejorative meaning in recent decades in what reeks of political overreach usually repeated by people who clearly have not taken the time to read the General Theory.   At its most basic level, Keynesian economics is a view of the world that states the following:

  • Investment (as in, spending, not consumed for future production and not stock market “investing”) is the primary driver of employment and involuntary unemployment occurs when investment is lacking (for whatever reason).
  • One of the primary drivers of investment is aggregate demand.  In other words, businesses make most of their investment decisions based on the demand they see from their customers.
  • The government can be used at points during the business cycle as a countercyclical tool to stabilize swings in aggregate demand and investment by implementing fiscal and monetary policy.  This means that Keynesians can favor both reduced government policies as well as expansive government policies depending on the state of the business cycle.

Unfortunately, Keynesianism has been boiled down to one simple and egregiously misleading myth:

  • Keynesians favor a permanent government takeover of the means of private production and that means they’re the same as socialists.

This is simply not the case.  A Keynesian can be in favor of large government, small government, monetary policy, fiscal policy and given its central tenet of investment, Keynesians understand the importance of private businesses.  It’s true that many Keynesians engage in their own form of political overreach (generally being in favor of big government all the time), but that doesn’t mean they represent the views of all Keynesians any more than Rothbard represented the views of all Austrians.

Mauldin continues by citing the famous Rogoff and Reinhart paper (a paper which I think is dangerously general in nature) arguing that government debt is necessarily unstable because the private sector controls interest rates:

“Secondly, as has been well documented by Ken Rogoff and Carmen Reinhart, there comes a point at which too much leverage on both private and government debt becomes destructive. There is no exact number or way of knowing when that point will be reached. It arrives when lenders, typically in the private sector, decide that the borrowers (whether private or government) might have some difficulty in paying back the debt and therefore begin to ask for more interest to compensate them for their risks. An overleveraged economy can’t afford the increase in interest rates, and economic contraction ensues. Sometimes the contraction is severe, and sometimes it can be absorbed.”

This is simply not true.  An autonomous currency issuing nation controls the interest rates on its debt.  A nation such as the USA, whose debt is denominated in a currency it can create, can always set the price of its debt.  This should be abundantly clear by now as the Fed has proven that bond traders simply cannot compete with its bottomless barrel of reserves.  If you think the private banking sector can move the Fed off its target rate then you’re simply not working within the realms of reality.  Granted, the Fed doesn’t control the economy or the rate of inflation (which could force the Fed off its target rate), but that’s a policy decision, not one that is imposed on the government by “bond vigilantes”.  Japanese bond traders have been making the same argument for the last 20 years.  Clearly, there are more moving parts here than just “bond vigilantes”.  (Please see here for a more thorough explanation on this point.)

I should also note that this is not necessarily a defense of government spending and government debt.  Government spending and debt could potentially be very destructive.  But there’s no need to create false arguments to make this point.  That’s just more political overreach.

Mauldin goes on to support government spending without actually knowing it:

“I would argue (along, I think, with the “Austrian” economist Hayek and other economic schools) that recessions are not brought on by insufficient consumption but rather by insufficient income. Fiscal and monetary policy should aim to grow incomes over the entire range of the economy, and that is accomplished by increasing production and making it easier for entrepreneurs and businesspeople to provide goods and services. When businesses increase production, they hire more workers and incomes go up.”

My consumption is someone elses’s income.  Therefore, it is a fundamental error to claim that a recession is caused by a lack of income instead of a lack of consumption.  They are two sides of the same coin.   Still, his resolution for boosting incomes is perfectly consistent with a Keynesian view of the world because the government, by definition, is increasing someone’s income when it spends more than it takes in (bear in mind, this can be achieved by lowering taxes OR increasing spending and often occurs endogenously as tax receipts decline or increase with the business cycle).  This is basic accounting.  The government’s deficit is someone’s else’s surplus.  When the government spends more than it brings in in tax revenues then it is increasing the dollar incomes in the non-government sector.  This increases business revenues via the income channel, especially when the funds go straight to business.  After all, one of the main reasons corporate profits are so high is because the government has spent so much more than its income in the last 5 years (again, the Kalecki equation shows this to be true).

Mauldin is dead right when he says this:

“Without income and production, nothing of any economic significance happens. Keynes was correct when he observed that recessions are periods of reduced consumption, but that is a result and not a cause.”

Production is crucial to the economy.  Keynes understood this.  That’s why he focused on investment.  But he also understood that production required consumption.  Again, two sides of the same coin.  Production matters.  So does consumption.  Firms need revenues to generate incomes so they can spend, invest, hire employees, etc.  This is a cornerstone of Keynesian economics.  Keynesian economics is not purely about boosting consumption all the time without the goal of boosting investment and production.

He continues arguing that it’s a “mathematical certainty” that you “can’t spend more than you make”.  This is another error in understanding.  In fact, in a credit based monetary system, households, businesses and even governments are just about always spending more than they make.  Again, a very basic exercise can prove this point.  If Person A spends $100 buying Person B’s widgets and saves that $100 then the total dollar spending is $100.  Total output for the period is $100.  Output = income.  If, in period 2, Person B then saves $50 and spends $50 on dinner from Person C then total income and output have fallen by $50.  If Person B had spent the total $100 then total income and output would have been $100 for period 2.  The same as period 1.  If, however, Person B had spent more than his/her income by borrowing $10 from the bank then he/she has spent more than his/her income and output/income has increased by $10.  This is an overly simplistic view of the credit based monetary system, but two important points should be noted:

1.  You most certainly can spend more than your income and over time private sector debts will inevitably increase just as they always have.  In other words, as the economy grows, production expands and balance sheets improve output, income and credit will likely grow in tandem.   In fact, growth will likely rely on someone spending more than their income over the long-term.


2.  We do not reside in a loanable funds based monetary system where we are all fighting over some limited pool of money.  The money supply, in a credit based monetary system, is elastic and can expand and contract as the supply of loans expands and contracts.   This is called endogenous money because the money supply is expanded endogenously by banks who create it “out of thin air”.   Banks do not compete in some loanable funds market to extend credit to their customers.

Mauldin then makes a similar error when he states the following:

“For those of you who were forced to endure Economics 101, you may remember that Savings = Investment. In any real-world economic system, you have to have savings in order to have investment in order for the economy to grow. “

I guess they don’t teach this until econ 102.  But saving does not necessarily finance investment.  Let’s say I spend $100 on your candy bar and you save that income immediately.  Your saving is $100 if even for the briefest moment.  In other words, your income not consumed is $100.  If you then consume $50 on dinner then you dissave $50 via consumption.  But that dissaving becomes someone else’s saving immediately.  In other words, your saving does not increase aggregate saving because your spending is someone else’s saving.   But let’s say a firm invests $100 in plants and equipment.    The firms has not dissaved.  The firm has invested.  In this case, the firm has $100 in plants and equipment and the seller has $100 in new income.   Indeed, it is often investment that creates saving.  I assure you Keynes understood this point even if he wasn’t technically a trained economist.

I understand John’s frustration with the current economic environment and even the state of what looks like a colossally ignorant government in the USA.  And as an entrepreneur and die hard capitalist I understand the desire to let capitalists and innovators do what they do best by not being chained down by an overly burdensome government.  But this argument against “Keynesianism” is based on a misunderstanding of what “Keynesian economics” actually is, and worse, tries to validate that erroneous position through misunderstandings of basic economics and the structure of our monetary system.

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  1. Right, Mauldin’s article has all the wrong things which Keynes debunked in the 30s.

    As Kaldor once said “Keynes’s avowed purpose was to save the capitalist system, not to destroy it”.

    • ““Keynes’s avowed purpose was to save the capitalist system, not to destroy it”

      Great quote. Too many people equate Keynes with Marx when in fact, Keynes was a critic of Marx. Marx wanted capitalism to fail and was certain it would. Keynes thought it could succeed, but wanted to save capitalism from its worst enemies – capitalists like John Mauldin who have no idea how the system operates.

      • Keynes really disliked Marx. See this paper here. I’ve also attached a quote from the paper.


        “How can I accept a doctrine which sets up as its bible, above and beyond criticism, an obsolete economic textbook which I know to be not only scientifically erroneous but without interest or application for the modern world? How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeois and the intelligentsia who, with whatever faults, are the quality in life and surely carry the seeds of all human advancement? Even if we need a religion, how can we find it in the turbid rubbish of the Red bookshops? It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here, unless he has first suffered some strange and horrid process of conversion which has changed all his values.”

        • “How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeois and the intelligentsia who, with whatever faults, are the quality in life and surely carry the seeds of all human advancement? ”

          That’s humorous considering that Mauldin’s article is about wealth inequality and Keynes clearly agrees with him that it’s the bourgeios who drive human advancement.

          It makes me wonder if people today have any clue who JM Keynes actually was or if they just spread myths based on something they read on the internet about Keynes and socialism/.

          • I’ve actually read all sorts of stuff by Keynes and read most of his General Theory (although in bits and pieces). Keynes wasn’t a socialist and most of his followers took his stuff way too far. I’d actually argue Keynes was well to the right of Cullen and is well to the right of most of the commenters on this page.

    • Yeah, I think that’s one of the things that a lot of people misunderstand. Keynes is unfairly associated with big government. It’s Marx who people are looking to condemn, but somehow Keynes got thrown into the meat grinder there with him. I guess 100 years of misconception will do that….

  2. Brilliant piece. Now if only some people would start thinking and trying to understand these points rather than bloviating their personal politics.

  3. I can’t believe John Mauldin quotes:

    “Nothing is more dangerous than a dogmatic worldview – nothing more constraining, more blinding to innovation, more destructive of openness to novelty.”

    before going into his dogmatic and hilariously wrong rant.

  4. Cullen, Keynes really disliked government debt. Keynes certainly didn’t want government deficits financed with central bank balance sheet expansion and he felt the budget should be balanced most of the time. Keynes also didn’t like freely floating exchange rates (I think this is because he felt it gave central governments too much flexibility, but I don’t know the reason). Keynes wasn’t a fan of bureaucrats and believed that government taxation should be below 25% of GDP.

    It’s not fair to group “Keynesian economics” as Keynes’ economics. Keynes was well to the right of almost all economists today that call themselves “Keynesian”.

    • I note that a Keynesian isn’t necessarily in favor of a large government or substantial government debts. In fact, I think you can be totally consistent with Keynesian economics and be in favor of a rather small government.

    • Suvy – I believe taxation has averaged 17.4% of GDP in the US for 40 years now. So I’m curious what your point is about the 25% number?

      And on deficits – we have no choice but to have deficits while we’re in a trade deficit. So are you saying Keynes prefers a weak enough dollar to get that into balance or surplus, or a closed economy, or some other solution to our trade deficit?

      • “And on deficits – we have no choice but to have deficits while we’re in a trade deficit. So are you saying Keynes prefers a weak enough dollar to get that into balance or surplus, or a closed economy, or some other solution to our trade deficit?”

        The position that the US finds itself in right now is very similar to the position of the UK in the 30s. Keynes actually did prefer a devaluation to fix that problem. Britain did leave the gold standard and devalue by the way. Here’s the video where Keynes talks about it. I’d prefer something similar (scraping our current monetary system). I do not like current account deficits. It makes no sense for rich countries to borrow from poor countries, but that’s what’s happening in the world right now. I think a variation of Keynes’ Bancor plan could work today too.

        That 25% number is what Keynes said. You can find it in a simple Google search. It was something he wrote to someone in a letter.

  5. “This is simply not true. An autonomous currency issuing nation controls the interest rates on its debt. A nation such as the USA, whose debt is denominated in a currency it can create, can always set the price of its debt.”

    Keynes was not a fan of this kind of a monetary system. I can’t emphasize this enough.

      • Take a look at these papers. They are very dense, but I think you’ll agree with most of this stuff. Endogenous money is a pretty old idea btw. I also think Keynes is defining the supply of money as the base money supply. David Glasner has a really good graph of Keynes’ model for the rate of interest in his book.

        There is, however, no such necessity for individuals to decide, con-
        temporaneously with the investment-decisions of the entrepreneurs, how much of their future income they are going to save. To begin with, they do not know what their incomes are going to be, especially if they arise out of profit. But even if they form some preliminary opinion on the matter, in the first place they are under no necessity to make a definite decision (as the investors have to do), in the second place they do not make it at the same time, and in the third place they most undoubtedly do not, as a rule, deplete their existing cash well ahead of their receiving the incomes out of which they propose to save, so as to oblige the investors with ” finance ” at the date when the latter require to be arranging it. Finally, even if they were prepared to borrow against their prospective savings, additional cash could not become available in this way except
        as a result of a change of banking policy. Surely nothing is more certain than that the credit or “finance” required by ex-ante investment is not mainly supplied by ex-ante saving. What part, if any, is played by it, we will consider in a moment”

        “How is it supplied? The entrepreneur when he decides to invest has to be satisfied on two points: firstly, that he can obtain sufficient short-term finance during the period of producing the investment; and secondly, that he can eventually fund his short-term obligations by a long-term issue on satisfactory conditions. Occasionally he may be in a position to use his own resources or to make his long-term issue at once; but this makes no difference to the amount of ” finance ” which has to be found by the market as a whole, but only to the channel through which it reaches the entrepreneur and to the probability that some part of it may be found by the release of cash on the part of himself or the rest of the public. Thus it is convenient to regard the twofold process as the characteristic one”

        • Thanks Suvy. Not sure when I’ll have some time to review, but I will definitely archive that stuff and have a look.

          I’m off for the night. Busy morning tomorrow so hopefully this comments section isn’t filled with people calling me a socialist by the time I return in the afternoon. :-)

  6. The former USSR had plenty of aggregate demand – people stood in long lines everywhere – and not enough aggregate supply.

    • That explains why Keynes thought so little of the Soviets:

      “unlike the Webbs, he [sc. Keynes] could never think of Soviet Russia as a serious intellectual resource for Western civilisation. In the 1920s he had said that Marxism and communism had nothing of scientific interest to offer the modern mind. The depression did not alter his view. Russia ‘exhibits the worst example which the world, perhaps, has ever seen of administrative incompetence and of the sacrifice of almost everything that makes life worth living …’; it was a ‘fearful example of the evils of insane and unnecessary haste’; ‘Let Stalin be a terrifying example to all who seek to make experiments.’”

      PS – I think you missed the point about Keynes not only being in favor of higher demand. Keynes was in favor of higher investment via the consumption channel. Keynes understood the importance of production.

    • “Keynes often expressed disdain for Soviet Communism. “Red Russia holds too much which is detestable,” he wrote, terming communism “an insult to our intelligence.” Communists, Keynes believed, were people who produced evil in the hope that good may come of it. And he had little respect for Marx, calling him “a poor thinker,” and Das Kapital “an obsolete economic textbook, which I know to be not only scientifically erroneous but without interest or application for the modern world.””

  7. Can you bookmark this somewhere on the site so that I can source it every time I see someone abusing the word “Keynesian”?

  8. I am sure John Mauldin is a nice guy, but let’s be real – he’s selling to his target audience. Mauldin is a feeder into large hedge funds and asset managers. That’s how he gets most of his compensation. So he’s feeding the 1% exactly the type of stuff they want to hear. And I hate to say it Cullen, but your message, no matter how right it is, will never beat out what sounds like sheer common sense by people like Mauldin.

    • I think there’s some truth to this. Especially with regard to the concept of aggregate demand (AD). Mauldin says that’s what defines Keynesians, especially when you worry about that in regard to recessions. I think the right wing of the econ universe has largely adopted this view at least in public. One of the groups that’s generally on the right, but DOES think AD is important (and would be offended if you called the Keynesians) especially during recessions (in fact they think a lack of it actually causes unnecessary recessions: at least twice a century) are the MMists…. the impression I get from reading them is they really don’t understand their monetarist and other neo-classical neo-liberal kin on the AD issue RECENTLY… it’s like it’s just become taboo to talk of AD issues in public w/in the last few years. Some groups like RBCers have always denied it, but it seems to have spread. You can’t get a piece in the WSJ anymore if you talk about AD. (I don’t know that that’ true, but that’s the impression I get from reading the MMists).

    • i may be wrong ;my guess is not one hedge fund or asset manager is a client of john mauldin. Mauldin himself has admitted to being a horrible investor. he[mauldin] is very good at articulating known macro issues.There is not much value in paying for what is known.
      Guys like mauldin appeal to those looking to confirm their ideologies.As Buffet and Munger point out,this is a very dangerous way to go about making your investment decisions.
      full disclosure:i am an investment manager and i have been very concerned about the macro and total debt issues for most of the past decade or so, for sure these concerns have cost me and my clients some money as we have not had maximum exposure to risk assets.My point is that it is not that i agree or disagree with mauldin,to do so, on either side is a very dangerous approach.

  9. you didn’t even discuss his main point on income inequality. instead, you just bashed a whole bunch of other points. nice work.

    • Well yea…. That was kinda the point of the post, wasn’t it? The post wasn’t about income inequality; it was about misunderstanding and myths with regards to Keynesian economics.

  10. Well, Keynes must be turning in his grave when he sees how today’s high priests of Keynesianism like Krugman have twisted his ideas. But when we speak today of Keynesianism we should mean Krugman and not Keynes himself, because this is how Keynes’ school is implemented nowadays.

  11. “This is simply not true. An autonomous currency issuing nation controls the interest rates on its debt. A nation such as the USA, whose debt is denominated in a currency it can create, can always set the price of its debt. This should be abundantly clear by now as the Fed has proven that bond traders simply cannot compete with its bottomless barrel of reserves. If you think the private banking sector can move the Fed off its target rate then you’re simply not working within the realms of reality.”

    You can argue the bust mechanism, but you cannot argue the simple idea that too much debt/GDP is a burden and that a constantly growing debt/GDP is not sustainable. In the case of public debt/GDP a constantly growing debt/GDP implies a rising share of government in the economy, thus the “socialist” accusations.

    • ” but you cannot argue the simple idea that too much debt/GDP is a burden and that a constantly growing debt/GDP is not sustainable.”

      True, you can’t argue that. debt/GDP has units of time. What does that tell us? Nothing really. People who use this measure don’t understand it has no direct bearing on economics.

      Debt service payments are one important flow in the economy. In fact, at the macro level, if debt service payments (a rate) exceed the gains in real productivity (a rate) then debt transfers wealth from the producers to the lenders. If the opposite obtains then the transfer is from the lenders to the producers.

  12. “He continues arguing that it’s a “mathematical certainty” that you “can’t spend more than you make”. This is another error in understanding. In fact, in a credit based monetary system, households, businesses and even governments are just about always spending more than they make.”

    Obviously you can do this over the short and medium term, but you cannot do it all the time, constantly. That is why economies used to have the Kondratieff cycle, which today’s “wise men” have decided to fight since 2000, starting with Greenscam.

    One important aspect that Keynes believes in and Mauldin criticizes is the belief that central planning works (Keynes: maybe only during market inefficiencies”, Krugman & Co: always), which is not mentioned in your rebuttal of Mauldin.

    Then your critique of Saving=Investment focuses only on the nominal, “monetary veil” aspects of the problem. Once you start looking at the issues from pure physical point of view, you will start noticing the merits of what he is talking about, e.g. “saving” means physical saving that cannot be printed out of thin air and the latter is a pure distorison of the allocation signals.

    But actually what Mauldin criticizes is the naive notion and fallacy that the rich “save” too much income and thus are a drag on economic growth. He points out that those “savings” are used for investment. Do you disagree with this? The broken window fallacy is another issue built in Keynes work and is worth criticizing a lot.

    Another correct point by Mauldin: “Neo-Keynesian economists are ultimately teenage children who want the pleasure of spending and consuming today rather than thinking about the future.” The quality of spending also matters, but Keynesians see only the quantity.

    And here another ~ correct point from Mauldin: “The “drag on consumer spending” was the result of too much borrowing and a bubble and not the result of an inability to borrow.”

    So yes, you can focus on some of the details he got wrong and it is good to be precise up to the lowest detail level, but you should also point out the big ideas in his essay and acknowledge what he got right (you do on only one point).

    • “But actually what Mauldin criticizes is the naive notion and fallacy that the rich “save” too much income and thus are a drag on economic growth. He points out that those “savings” are used for investment. Do you disagree with this?”

      The question is how much of the savings are used for investment or consumption.

      Sometimes all the savings are used for investment and then I think we’re agreed there’s no problem.

      What if the economy does not provide enough productive investment opportunities? It would be stupid to make unproductive investments. You spend your money to make a product you can’t sell, what good is that?

      So if you can’t find enough good investments, what do you do? You *could* take the money and fill your swimming pool with caviar and take videos of beautiful girls jumping into it. Or you could wait for good investment opportunities….

      What if sometimes not all the savings are invested or consumed either one? Do you think that can ever happen?

      • So what? You want to centrally plan and micro manage how people invest their savings? Maybe people do not want to invest because they overinvested in the previous period, etc.?

        • “You want to centrally plan and micro manage how people invest their savings?”

          I don’t have a good proposal for a solution to the problem.

          “So what?”

          “But actually what Mauldin criticizes is the naive notion and fallacy that the rich “save” too much income and thus are a drag on economic growth. He points out that those “savings” are used for investment. Do you disagree with this?”

          It appears that Mauldin claims this can never happen. He claims that all savings are always invested, so that a surplus of savings can never result in reduced demand.

          I believe he’s wrong. Sometimes — not always but sometimes — savers try to save too much, the economy does not have an adequate amount of productive investments lined up to use those savings, and the result is a drag on economic growth. I don’t know what to do about it. It doesn’t make sense for the government to borrow money and spend it and pay interest forever when the people who own the money want to sit on it. It doesn’t make sense to take it away from them just because they refuse to use it. It’s a problem with no obvious solution.

          Do you disagree?

      • Are the wealthy really ‘investing’ their money, or just buying financial securities on the secondary market.

        • “Are the wealthy really ‘investing’ their money, or just buying financial securities on the secondary market.”

          Suppose you buy a company’s stock on the NYSE. If the person who sells you the stock then *spends the money*, you have caused hardly any delay in consumption.

          Say you buy stocks, and the person who sold them to you then spends the money on more stock in the same company. You bring in more savings and buy more, and he takes his winnings and buys more too. He brings in more savings and buys stock from you. The price goes up and up. You both make great profits. Then suddenly the company goes bankrupt. Whoever is holding the stock has lost all the money he put into it. The last guy to sell has won a lot. If he then spends the money, he hasn’t delayed the consumption all that much.

          Besides, until the money is witdrawn it’s kept in a money market account and loaned to anybody who qualifies for the loan, so if somebody has a productive investment and needs to borrow money to do it, your money is there for them. And the faster you churn your account the more of your money your broker gets to spend.

          It’s complicated.

    • We have a monetary economy. Not a barter based metallist economy. You and mauldin clearly don’t get that.

      • No, I fully get that. What you do not get is that the “monetary” economy was supposed to “account for” the real economy, but now things have been turned upside down and this has caused problems.

        • How was the “monetary” economy supposed to “account” for the real economy?

          Money simply makes the economy work more smoothly. We can postulate an economy without money in which every transaction involves a contract (I’ll bring you a bushel of apples in the fall for four bushels of potatoes delivered on May 1).

          Money allows the abstraction of the contract system to be part of our “normal” life experience.

          At the macro level, money is just a medium of exchange. It can’t be anything more without violating the First Law of Thermodynamics. But at the micro level, money is both a medium of exchange and a store of value. The inability of most people to abstract from disparate starting points makes this terribly confusing to most people.

  13. If person A gives one hour of financial advice to person B for their gold watch, then total spending is one hour of financial advice for one gold watch. If person B then imparts half an hour of financial advice secrets to person C, whilst Person C serves them dinner, total spending is half an hour of financial advice for dinner.

    Person B still has half an hour of financial secrets that can be exchanged (in fact probably multiple times) for income (or dinner) in the future. Savings represent command of resources that can be used to derive income in the future. Investment represents a collection of resources that together can be used to derive income (hopefully more than the sum of the parts of the resources involved). Not sure how you get the latter without the former – ditto for consumption – unless using credit (which is someone else’s real savings or a banking system’s fractional savings). The contemporaneous question doesn’t matter, they put together someone’s savings real or unreal (i.e commanded via the banking system).

    The point being that Mauldin’s macro statements ring true over real variables. Keynesians need to channel their inner-Shostak (or Sechrest) to better critique Keynes (and neo-Keynesian beliefs which unfairly represent Keynes but fairly represent policy makers).

    p.s. I thought the article was about inequality blame-sharing not the age old debate about “stones into bread”

  14. And just when was it …… when ….. “they” were ever for SMALL government?

  15. If the Fed cannot control inflation, then ultimately then they cannot control the interest rate.
    It is true that government deficit spending is somebody else’s income, but you leave out that government deficit spending is also somebody else’s liability. It must be ‘paid back’ either by the taxpayers or by inflation or by default.

    Advocating expanding deficit spending of any kinds (government and private) is simply not responsible without at the same time spelling out what kinds of limits there are to these. Or, by putting forth some explanations for how we can recover from a credit bing.
    In the same vein, some investing is constructive and some (housing, for one) is not. We don’t appear to have any tools to measure which is positive and which is not.
    We had a financial crash and are experiencing an extended ‘muddle through’ because of foolish and excessive borrowing and because we don’t really know how to deleverage. That’s what should inform our policy discussions today.

    • This kind of low level ideological thinking is perhaps a major source of economic and political problems.

      “some investing is constructive and some (housing, for one) is not.”

      Wow, did someone actually say that? It’s this kind of embracing of ideology and rejection of intelligence that is at the core of our struggles. Food, shelter, and clothing are core requirements for human existence. Housing is then at the very core of real productivity. We may consume housing above the minimum required, but it’s far easier to connect over consumption of housing with a real need (housing) than to connect consumption of non-needed production (e.g. entertainment).

      Once you get beyond sustenance level, all excess productivity (and hence consumption) goes into things which have arbitrary value. If we build machines to produce more things we don’t need (but want) calling this an investment vs consumption has no logical basis.

      Remember, that at the macro level, the integral over all flows at all times has to be zero or you violate the First Law.

      • This is what I mean.
        We’ll start with something you wrote.

        Money simply makes the economy work more smoothly. We can postulate an economy without money in which every transaction involves a contract (I’ll bring you a bushel of apples in the fall for four bushels of potatoes delivered on May 1).

        Explanation: We have an economy today which is based on the buying and selling of those contracts.
        So a house does not represent the value of the construction. A house is a mortgage instrument that creates deposits. You can even leverage that contract 10 times and the Federal Reserve will buy your contract for the full amount.
        And the man trading apples contracts is not interested in apples. So long as apple production goes up, his contract will grow *even more than the value of the apples*. And if the apple grower increases his production, the contract holder reaps most of the benefits.
        He can sell that contract to the holder of the potato contract for deposits that are created to buy and sell these contracts.
        In today’s economy, a man can make more buying and selling apples contracts than he can putting his initial stake into an orchard.

        • “In today’s economy, a man can make more buying and selling apples contracts than he can putting his initial stake into an orchard.”

          Imagine for a moment that there was a fixed amount of stuff to buy and sell. Then for anybody whose wealth increased, somebody would have to lose. It would be a zero-sum game.

          If people can on average make money buying and selling apples contracts, rather than some winning what others lose, there has to be production somewhere.

          But you talk like the profits are much bigger than the increase in apple production. Is it that the money production is going up, so that people can accumulate money far faster than they can accumulate apples? That would be inflationary if they used their money to buy apples. But so long as they only use it to bid up the prices on apple contracts, it isn’t inflationary….

          Until something changes….

          • 1. There is more inflation in the system than is reported. The cost of living for the median has, at best, stagnated, even while the wealth of the country as a while has increased. The price of most things should be going down, not up, because of advances in productivity and bringing new workers on line.
            2. If most of that money stays in the system, then the inflationary aspect is lessened.
            3. Maybe if the money can be removed from the wealthy and put to productive use, we won’t have inflation.

            • “The price of most things should be going down, not up, because of advances in productivity and bringing new workers on line.”

              1. If somehow prices started to go down, wouldn’t the Federal Reserve feel it was required to bring prices back up? They have a duty to prevent deflation or too much inflation.

              Besides, lots of the competition in the more-or-less-free markets is not on price. Like, if I want to put together a computer by hand, I have to buy a processor. I can buy one for full price, or I can buy one that has something wrong with it, cheaper. They talk like the cheaper ones are the rejects that didn’t make it through testing, but in practice most of them were designed to be crippled so they could be sold cheaper. A whole lot of electronics is that way. It’s cheaper to design a circuit that can be crippled to various degrees than to design separate circuits with reduced functionality to be sold at a lower price.

              If you were to produce a full-function product at the cheaper price, why would that be a profitable thing? Likely the final customers would assume there was something wrong with it because it was priced at a something-wrong level.

              2. “If most of that money stays in the system, then the inflationary aspect is lessened.”

              Yes. On the other hand, if there’s a lot of unused productive capacity that is not being used because people aren’t spending, then extra spending wouldn’t necessarily result in increased prices. Increased employment, increased production, increased sales, but if marginal cost doesn’t go up, maybe marginal price won’t either?

              3. “Maybe if the money can be removed from the wealthy and put to productive use, we won’t have inflation.”

              But that’s a moral issue. If we take money away from the people who earned it by creating productivity and give it to people who haven’t earned it, how is that moral?

              Besides, everybody knows that all our wealth is because of people who saved instead of spending. It’s saving and investment that creates wealth. If we take money away from people who save it and give it to people who spend, we will have less saving and less investment, production will go down, and we will all be poorer.

              Everybody knows that all our wealth comes from investors and from nowhere else. If investors don’t find good investment opportunities, it’s a cinch anybody else will do worse. Taking money away from the people who earned it is punishing success and rewarding failure. It can never succeed.

              Everybody knows that we need to maximize savings and investment. China saves far more than we do and they outcompete us. Before they had their collapse Japan saved far more than we do and they outcompeted us for awhile.

              You are advocating something that everybody knows is immoral, and everybody knows cannot work. To most people it’s obvious that the government needs to cut its spending so low that it can cut taxes a whole lot and still balance the budget. Eliminate government regulation of business. Eliminate transfer payments. Encourage everybody to save as much as they can. Then we’ll get back on track and the economy will grow fast.

              When you say something that everybody knows is wrong, it’s unlikely you can get them to try it out.

              • 1. Reduced prices does not equal deflation. The price of the cost of living generally falls in a growing economy, although in the U.S. this is not happening anymore.
                2. We are assuming that there is unused productivity because people are not spending. Perhaps, but there is unused productivity because people are not being educated, and children are being brought up by single moms and some people would rather not work. Debt solves none of that.
                We also have a mindset that just because we can produce 30 million cars a year, we are under capacity if we only sell 15 million. This is Soviet apparatchik thinking. What if people don’t want cars but need something else.
                3. The moral issue. If you are growing apples and selling them and I take your apples, then that is a crime. But if am growing apples and you are getting rich trading apples contracts, then it’s not immoral to take away your deposits.

  16. Excellent!

    Cullen – you are far too complimentary toward Mauldin. He has and continues to do a great disservice to his readers. He misleads using many of the same techniques as Rush.

    He sells fear and makes a fortune doing it.

    If one wants a detailed and in-depth macro view then read Gary Shilling.

  17. Haven’t really read Keynes but my understanding of big gov / small gov is that government should build a surplus in times of plenty to use in times of scarcity. Just the opposite of what the Bush / Greenspan years contributed by fueling a runaway business cycle by spending like drunken sailors. Socialism for the rich then is what caused the dept problem we have today not food stamps.

  18. Mauldin has in my view rejected MMT/R, although I haven’t seen anything from him that shows any analysis and a considered opinon.

    Maybe Cullen could write hime a letter by registered mail and ask for his views. I tried an email with a reference to Bill Mitchell’s blog without response.

    Having said that I would say that Mauldin is well worth reading most of the time, but if you accept MMT/R then you will find yourself not accepting his views more often than rarely.

  19. Cullen, thanks for posting yet another good piece. It just so happens that last week I read an article on Reason magazine’s site “Forget budget wish lists. A sluggish economy calls for much less federal spending.”

    I felt compelled to post a comment to that article, basically saying that at times, federal spending is helpful, such as in the financial crisis. I even mentioned the Kalecki equation. Predictably, I was called a Keynesian and was told I was wrong.


  20. I wish more people would understand that the budget deficit is endogenous as you stated. It basically grows with tax receipts which means that it’s the private sector’s performance which determines the size of the budget deficit.

  21. You might not understand Keynesian economics if:

    1) You assume Keynesians just want to boost consumption.
    2) You assume Keynesians are socialists.
    3) You assume that Austrian economics has anything remotely useful to say.

  22. It’s funny – if more Republicans understood how obsessed Keynes was with investment they’d probably all be Keynesians. In fact, Peter Drucker and JK Galbraith knew long ago that Keynes was a conservative:

    “Peter Drucker, a conservative admirer of Keynes, viewed him as not merely conservative, but ultraconservative. “He had two basic motivations,” Drucker explained in a 1991 interview with Forbes. “One was to destroy the labor unions and the other was to maintain the free market. Keynes despised the American Keynesians. His whole idea was to have an impotent government that would do nothing but, through tax and spending policies, maintain the equilibrium of the free market. Keynes was the real father of neoconservatism, far more than [economist F.A.] Hayek!”

    John Kenneth Galbraith, whose politics were well to the left of Keynes, not to mention Drucker, agreed with this assessment. “The broad thrust of his efforts, like that of Roosevelt, was conservative; it was to endure that the system would survive,” he wrote. But, Galbraith added, “Such conservatism in the English-speaking countries does not appeal to the truly committed conservative.””


    As Keynes himself explained, “the class war will find me on the side of the educated bourgeoisie.”


    A real Keynesian is a conservative. Not someone in favor of bigger government all the time. The thing modern conservatives hate is what “Keynesian” has become, which is essentially much more socialist than what Keynes himself actually believed.

  23. The more I think about it the more I think Cullen is actually someone who is very close to the original Keynes. He’s a non-economist, centrist, investor who actually understands how the system works.

    Now, if we could only figure out a way to get you into the US Treasury like Keynes was able to do in Britain.


  24. Cullen, thank you for addressing Mauldin’s most recent piece. I read Mauldin for years when he took a more balanced and analytical approach to the issues. A’las, this is no longer the case…he is simply parroting the political views he wishes to endorse. Not much of what he writes these days are grounded in fundamental analyses.

  25. In the parlance of science, Mauldin is an idiot. It is fine to speculate about an unknown future, but once you reject rational thought in analysis of the past, you are, by definition, an idiot. Why so many people subscribe to the views of a village idiot is an interesting psychological study (actually, decades of PhD dissertations). Why Cullen reposts this is also an interesting study. People rarely repost something by a person less intelligent than they perceive themselves.

    • John,

      If you write one more comment with an ad hominem I will stop publishing your comments. This is a “parlance” I don’t put up with around here. And no, it’s not the “parlance of science”. It’s the parlance of the school yard. I have warned you a number of times already. If you can’t contribute to the conversation without calling people names then I will stop you from contributing because this is a totally unproductive way to converse with people. I won’t warn you again. Thanks.

  26. Cullen, it’s not ad hominem when you specify the logical nature of the disagreement. In fact it’s distinctly not ad hominem. I clearly stated the basis for my disagreement with Mauldin (see sentence 2 in earlier response). In fact, it’s exactly the opposite of an ad hominem comment. It’s commenting on a specific aspect of the discussion, the unknown future, and reflecting the absolutely true fact that rejecting the data of the past is only possible for an irrational person.

    Mauldin is an idiot in any view of the world that treats facts as sacrosanct. Even idiots say some things which are true. But to confuse this as knowledge is not just a weakness, it’s an admission of intellectual feebleness.

    • John,

      You’re making the comments personal rather than remaining objective. You’re making a sweeping comment about Mauldin’s knowledge. He’s certainly not an “idiot”. He might have a few things wrong here, but that doesn’t make him an “idiot”. And even if you’re convinced that you think he’s an idiot you should really just keep that to yourself and attack his points with facts of your own. Nothing positive comes from this type of personal name calling. It just degrades your point. You write a lot of good comments here that get watered down by your name calling.

      Personally, I don’t provide this forum here so people can be abused and called names. I provide the forum so that productive discourse can take place. If you feel the need to call people names then do it somewhere else. I won’t allow it here.



  27. I really enjoyed this post. The comments, not so much.

    I still read comments because I’m always hoping there will be productive discussion. There are a few good ones in here, but most of it is (sorry for the pejorative) mindless drivel with bizarre attacks on Krugman that have no basis in reality and weird mantra-like repetitions of the big gov/small gov false dichotomy.

    I know a lot of people wish Krugman were one-note/illogical/idiotic because that would make it easier to believe the weird things about the world they believe, but the facts just don’t back it up. Sorry, guys.

    And all the big gov/small gov stuff, do you ever stop to consider that the gov is a complex organism? Is big gov just the top line number for you? What if the gov employed a skeleton staff (no massive army or regulators) but had a huge safety-net of transfer payments? Is that big gov? Do you start to see why this issue is a little more subtle than the false dichotomy you portray? Some advocates are for big safety nets without regulation. Some advocates are for big regulation and little to no safety nets. I bet you’d be shocked to discover that these advocates often think such because their favored way of gov is more conducive to their success than the other. Funny how that works. Funny how people who are just advocating for their own self interest are suddenly somehow “wrong” and “idiots” as if there is only one true answer on how gov should be set up and run.

    And on Keynes, my word, just because you don’t believe everything Keynes ever wrote doesn’t mean you’re not a Keynesian. There’s not some litmus test of 100% agreement. I’m on board with his views on investment and ag demand, but think he had a limited understanding of other areas like the endogeneity of the monetary system. He might be right on those other issues, but I don’t think so. It doesn’t mean that I reject the things I do think he got right. I find it hard to believe I have to explain things like this, but such is life, right?

      • +2

        Extremely politicized post by Mauldin in my view, many key conclusions that the author masks as irrefutable facts when they are very much his own ideology-based opinions. Thank god for pragcap and MR.

        Cullen, just one minor issue with an otherwise great, I think you are doing the same mistake as Mauldin in drawing generalized conclusions about “an overly burdensome government” and entreprenurial activity.

        Obiously biased here but check out INSEADS innovation index. Sweden, Denmark and Finland, some of the countries with the highest tax levels in the world, are all top 10. Switzerland on the other hand, with very low taxes, is number 1. Also from a growth perspective Nordic countries has done well relative other developed nations, especially the last decade.

        This leads me to suspect that the size of government is not very important in explaining innovation and growth capability, it is all about the quality of governance. Of course, having a poorly run huge government will lead to big inefficiancies. But having big well-run government is far from a utopia. And you can definitely have a big government and a good environment for entrepreneurs at the same time, I guess you know where skype, spotify, minecraft etc comes from..

    • Just a note, endogenous money is a very, very old idea. Endogenous money was ingrained in the British banking school and well before that. Keynes certainly understood the idea and Keynesian economics isn’t Keynes’ economics (ex. IS/LM is Keynesian, but it was a model Keynes explicitly rejected). Keynes was actually rather conservative economically, especially towards the latter end of his career.

      • OK, but what does it really matter what Keynes thought?

        Like, Darwinism is not much about Darwin — he didn’t understand genetics at all by modern standards What he said is mostly interesting to hbistorians, and to Creationists who treat his work like the holy sacred text of a competing religion.

        If Keynes’s name happened to get attached to some economics ideas, that needn’t have much to do with Keynes. Probably less than Marx has to do with marxism or Freud with freudianism.

        Possibly no more than Mercant had to do with mercantilism. (joke)

        • Those are actually pretty good points. Followers twist dead guys’ words/ideas all the time and the followers are almost always more radical than the leaders.

  28. To paraphrase Keynes: Market commentators can remain irrational longer than any sane person can bear repeatedly correcting them.

  29. If you take the word ‘investment’ and replace it with ‘flow of money’ it all makes a lot more sense and explains why the production/consumption difference is not very meaningful.
    Modern economics is mainly about the movement of money.

    • Wally, flow of money is important, but the difference between production and consumption is important too.

      Put it this way — if you’re playing a game of Monopoly, you’ll be interested in the flow of money. But also you’ll care about other things. There’s a big difference between landing on Broadway with a hotel and having to pay rent, versus buying Broadway. That’s kind of like the difference beween consumption and investment.

    • I’ve read the General Theory pretty carefully. And maybe I am missing the point in the original text, but the key conclusions I came to were the ones I outlined in this post in the first three bullet points. So, when I see someone try to describe a “Keynesian” without emphasizing the importance of investment a big red flag gets raised. All the talk about aggregate demand is important no doubt. But increasing aggregate demand was only a channel by which Keynes wanted to increase investment. So there seems to be this myth in modern macro where everyone thinks that Keynes just wants to boost demand all the time. As if we can just become a country that consumes, consumes, consumes. But that’s not what Keynes believed at all. So I don’t see any of those posts really touching on what it means to be a Keynesian. In fact, not one of them even mentions the word “investment”, which is baffling.

      Modern macroeconomists seem intent to boil theories down to “this or that”. Keynes didn’t think like that. Keynes knew that supply mattered and that it was innovation via investment that advances “the quality in life and surely carry the seeds of all human advancement”. But he also understood that investment was contingent on strong demand. It wasn’t a “this or that” proposition as many modern macroeconomists imply.

      • “But that’s not what Keynes believed at all. So I don’t see any of those posts really touching on what it means to be a Keynesian. In fact, not one of them even mentions the word “investment”, which is baffling. ”

        Good point: I don’t recall seeing that either in those posts.

        Maybe the focus on AD in the above happens because of the parallels between the Great Depression of the 1930s, when Keynes did some of his important work, and now in the aftermath of the Great Recession. Recall that to AD believing neo-Classicals, a lack of AD is a culprit in both extraordinary cases. Sumner, for instance says he’s only going to become a monetary crank insisting on more money printing twice a century… the rest of the century he’s a moderate supply sider inflation hawk. Perhaps it’s the present circumstances which color the views of the above posts.

        • I don’t know of any case of the term being used before Keynes, but here’s the quote from the General Theory:

          after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest.

          I’ve always understood this to mean something different from the environment we’re in and I don’t think Keynes would have agreed with the way some economists use it today.

          First of all, Keynes says that bonds and money become perfect substitutes and that the central bank has effectively lost control of interest rates. I don’t see this as being the case in the current environment because the Fed clearly has been able to push interest rates lower and long bonds are clearly not perfect substitutes for money. Non-government bonds definitely aren’t.

          Second, most modern macroeconomists use the IS/LM model to portray this concept. But this implies a loanable funds based model of the world. I’ve already expressed my views on that in my debates with Krugman a while back, but I think Keynes would have agreed that the IS/LM model was totally deficient in describing this situation.

          But there’s a lot of debate about this. Keynes has stated at times that he thought the money supply was determined by the central bank and that loanable funds would have applied. But there are also quotes where he expresses an understanding of endogenous money. So I don’t think the answer is very clear. Still, I don’t think Keynes would call this a liquidity trap. I think that Keynes, were he alive today, would have been a strong proponent of endogenous money and would have clearly called this a Balance Sheet Recession because the demand for debt was lacking. There’s no way Keynes could have lived through discussions with Robinson, Minsky and Tobin without understanding and AGREEING with them on this concept. I find that very hard to believe.

      • The General Theory is actually heavily mathematical. If you pay attention to the footnotes, you’ll see some really crazy stuff. I’ll attach some papers in a bit once I find them. These are papers written about TGT by others.

        • Suvy, check further down (on the next page) for Blue Aurora’s comment: he provides a link to some other links… specifically directed to your comment here I think.

          • Yea, I told him to post that stuff here. I thought at least one person here would find it interesting.