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Sun Jul 16th, 2006 at 09:19:44 AM EST
This diary is a continuation of an exchange with Drew.
As I said there, I am trying to read Keynes' General Theory and I find it rather hard because it is a technical book written for professional economists, and moreover it is written as a polemic in which Keynes' ideas are not presented in a logical way, but primarily in opposition to (and as an improvement on) what was then mainstream (nowadays callled "classical") economics. One of the bits that strikes me as most interesting in this first reading so far is how he argues that all economic concepts should be monetarized in order to make economics properly quantitative. In this he is not wrong, and he is aware that he is throwing out some important things by making this decision, but like any good mathematician faced with an intractable problem he is deciding to tackle a different but related problem which is tractable, and trying to convince the rest of economists that this is the best way to make progress.
This ties in with our previous discussions of GDP, one-dimensional criteria of optimality, and so on. The idea is that one can only speak quantitatively of that which can be measured precisely, that the most precise economic measurement is in money terms, and so that all important economic concepts should be monetarizable.
Below the fold, some quotations and focused commentary.
From the front page ~ whataboutbob
Nevertheless these difficulties are rightly regarded as 'conundrums'. They are 'purely theoretical' in the sense that they never perplex, or indeed enter in any way into, business decisions and have no relevance in the causal sequence of economic events, which are clear-cut and determinate in spite of the quantitative indeterminacy of these concepts. It is natural, therefore, to conclude that they not only lack precision but are unnecessary. Obviously our quantitative analysis must be expressed without using any quantitatively vague expressions. And, indeed, as soon as one makes the attempt, it becomes clear, as I ope to show, that one can get on much better without them.
To be slightly snarky, I will just recall some common jokes circulating among physicists and mathematicians to the effect that, when the professor says "it is natural", or "obviously", he is arguing "by intimidation": if it is obvious, and I don't see why this is, I must be stupid. And if I ask the professor to explain the "obvious" I will be exposed as a dunce. So I'd better not ask and convince myself that it is indeed obvious. Only children and madmen allow themselves to see that the Emperor has no clothes.
On with Keynes:
The fact that two incommensurable collections of miscellaneous objects cannot in themselves provide the material for a quantitative analysis [here Keynes is referring to the fact that it is an imprecise statement to say that production has increased if the production of some goods increases but that of others decreases] need not, of course, prevent us from making approximate statistical comparisons, depending on some broad element of judgement rather than of strict calculation, which may possess significance and validity within certain limits. But the proper place for such things as net real output and the general level of prices lies within the field of historical and statistical description, and their purpose should be to satisfy historical or social curiosity, a purpose for which perfect precision—such as our causal analysis requires, whether or not our knowledge of the actual values of the relative quantities is complete or exact—is neither usual nor necessary. To say that net output to-day is greater, but the price-level lower, than ten years ago or one year ago, is a proposition of a similar character to the statement that Quess Victoria was a better queen but nott a happier woman than Queen Elizabeth—a proposition not without meaning and not without interest, but unsuitable as material for differential calculus. Our precision will be a mock precision if we try to use such partly vague and non-quantitative concepts as the basis of a quantitative analysis.
A somewhat flippant retort would be to point out that maybe it is quantitative analysis that should be given up instead of the fuzzy concepts he criticizes. But what Keynes is trying to do is actually quite reasonable:
In the case of an individual firm or industry producing a homogeneous product we can speak legitimately, if we wish, of increases or decreases of output. But when we are aggregating the activities of all firms, we cannot speak accurately except in terms of quantities of employment applied to a give equipment. The concepts of output as a whole and its price-level are not required in this context, since we have no need of an absolute measure of current aggregate output, such as would enable us to compare its amount with the amount which would result from the ssociation of a different capital equipment with a different quantity of employment. When, for the purposes of description or rough comparison, we wish to speak of an increase of output, we must rely on the general presumption that the amount of employment associated with a given capital equipment wil lbe a satissfactory index of the amount of resultant output;—the two being presumed to increase and decrease together, though not in a definite numerical proportion.
Is he saying <gasp> that GDP is not a useful measure to compare performance between countries, but only within countries, and even then when the capital endowment of a country doesn't change appreciably? In any case, he is definitely saying that macroeconomics is not microeconomics, something that apparently needed to be pointed out to economists in the 1930s, and may still need to be pointed out today.
But now comes the best part, wherein Keynes tells us that the way to measure employment is not to count the number of employed people, but the aggregate wages.
In dealing with the theory of employment I propose, therefore, to make use of only two fundamental units of quantity, namely, quantities of money-value and quantities of employment. The first of these is strictly homogeneous, and the second can be made so. [Not all jobs and workers are the same, but he's about to show us how to make them the same] For, in so far as different grades and kinds of labour and salaried assistance enjoy a more or less fixed relative remuneration, the quantity of employment can be sufficiently defined for our purpose by taking an hour's employment of special labour in proportion to its remuneration; i.e. an hour of special labour remunerated at double ordinary rates will count as two units. We shall call the unit in which the quantity of employment the labour-unit; and the money-wage of a labour-unit we shall call the wage-unit.
So if I make twice as much as you, I count as twice as much labour as you do! Now, how is it that we cannot apply the same argument to inhomogeneous products, measure everything in price units, and rescue GDP from the limbo where it seemed to habe been banished?
This assumption of homogeneity in the supply of labour is not upset by the obvious fact of great difference in the specialised skill of individual workers and their suitability for different occupations. [obvious facts of experience are not known to stop an economist on his tracks: that much is a fact of experience </snark>] For, if the remuneration of the workers is proportional to their efficiency, the difefrences are dealt with by our having regarde dindividuals as contributing to the supply of labour in proportion to their remuneration; whilst if, as output increases, a given firm has to bring in labour which is less and less efficientfor its special purposes per unit-wage paid to it, this is merely one factor among others leading to a diminishing return from the capital equipment in terms of output as more labour is employed on it. [Keynes has earlier argued that increased employment correlates with lower wages] We subsume, so to speak, the non-homogeneity of equally remunerated labour units in the equipment, which we regard as less and less adapted to employ the available labour units as output increases, instead of regarding the available labour units as less and less adapted to use a homogeneous capital equipment.
To sum up, GDP is still banished to limbo:
It is my belief that much unnecessary perplexity can be avoided if we limit ourselves strictly to the two units, money and labour, when we are dealingg with behaviour of the economic system as a whole; reserving the use of units of particular outputs and eqquipments to the occasions when we are analysing the output of individual firms or industries in isolation; and the use of vague concepts, such as the quantity of output as a whole, the quantity of capital equipment as a whole and the general level of prices, to the occasions when we are attempting some historical comparison which is within certain (perhaps fairly wide) limis avowedly imprecise and approximate.
by Oui - Mar 16
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