Sunday, September 25, 2011

Stranger and Stranger

I am pretty sure that Steven Landsburg has a very high IQ. This does not prevent him from expressing opinions that seem utterly lacking in ordinary judgement. I am sometimes reminded of the opinions of my favorite string theorist - no, not that one - my other favorite (fictional) string theorist, Sheldon Cooper.

This disquisition on Keynesian economics is an utter classic. I keep thinking it's intended as satire, but it really doesn't seem to be.

I have a very naive question for the Keynesian economists:


Why aren’t you thrilled with the current state of the economy?

Here’s why I ask: According to what I take to be an orthodox Keynesian view, we are now in a liquidity trap. (My question does not apply to Keynesians, new or old, who believe otherwise.) That means that people want to hold lots and lots of money instead of spending it. Cool! We can provide money at almost zero cost. So it should be easy to make people very happy. What’s the problem?

Of course, people are working less, but that makes perfectly good sense in a world where people prefer to consume less. Why spend all day on an assembly line churning out widgets that people prefer not to buy?

A quick and obvious answer is that the people who are choosing to accumulate money and the people who are out of work are not the same people. In other words, to put this in slightly more technical language, you can’t address this question in a so-called “representative agent model” — a model that abstracts from interpersonal differences.

Still: The theory, as I understand it, is that vast numbers of people are choosing to hold vast amounts of money. Since money can be produced costlessly, this ought to count as a very good thing — which should offset a lot of very bad things, no?

OK, at this point I think I might have actually tuned into one of those crazy homeless guys on the street corner. Landsburg's failure to understand that market fear, mass unemployment, idle factories and widespread economic misery is a bad thing is peculiar to the point of being spectacular.

Why can't he understand that point? It seems to be that he doesn't find the Keynesian utility functions, or lack thereof, satisfactory.

There is more, but I will only include a fragment:

After all, when people hold money, they do it for a reason. That reason will vary from one new strain of new Keynesianism to another: Either money contributes directly to people’s utility, or it’s a prerequisite for transacting business. If we’re in a liquidity trap — that is, if people are hoarding money — there’s no problem transacting business, so (as far as I can see) they must be holding money for utility’s sake. In other words, if they’re hoarding, it’s because they like to hoard. Which brings me back to my question: Why, as the stock of money continues to grow, shouldn’t the joy of hoarding eventually compensate for the annoyance of not having food on the table?

I think autism spectrum may be more heavily represented in economics than physics.