So a couple questions for those who have read Keynes

So a couple questions for those who have read Keynes.

A high liquidity preference relates to a decreasing slope of the interest rate increase or an increasing negative slope of the decreasing interest rate right?

And the second thing... Keynes fundamentally views 'saving' and 'investment' as fundamentally different things. To the point where the excess of urge towards saving over investment is one of the two main causes of aggregate demand being so much lower than aggregate supply. How can this be if the amount saved and invested must be equal, which is how the interest rate is determined?

>A high liquidity preference relates to a decreasing slope of the interest rate increase or an increasing negative slope of the decreasing interest rate right?

I just answered my own question. I believe this fundamentally means the long-term interest rate goes down relative to the short-term interest rate.

The second point is still active though, a pretty big quandary for me tbqh.

>A high liquidity preference
depends if its a long term increase in liquidity preference(technology) or a short one(recession)
> How can this be if the amount saved and invested must be equal, which is how the interest rate is determined?
obviously the reality is more complicated than a saving=investment model. Could be that mon ey is fleeing the country(not necessarily a full capital flight scenario, but could be because other countries are a bit safer etc). Other reasons are stuff like fractional reserve banking making them unequal, people hoarding cash etc.

>depends if its a long term increase in liquidity preference(technology) or a short one(recession)
How do you know if the increase or decrease in liquidity is short term or long term?

Not all recessions are short, either. And to be honest with you, the longer the recession the more apt it is to raise the liquidity preference, meaning the rates for long-term investments start improving even during the recession.

The second part of your answer is sufficient because it's something I agree 100% on. I can see how this would be the case.

Sorry I meant lower the liquidity preference.

>How do you know if the increase or decrease in liquidity is short term or long term?
Maybe I worder it poorly, for short term i meant more of a 1-10 years horizon, basically what keynes meant with transactionary and speculative motives for lqiuidity. But for precautionary motive you could argue that if the social safety net improves(or improvements in financial stability of the whole system) there will be a long term decrease in liquidity preference of money. How much of an effect would that be? probably very small

That's a good point, and a great way to differentiate between the three motives. Considering in Keynes' quantity of money theory, he pools precautionary and transactional motives together and says they are essentially dependent on the aggregate volume of income and income-velocity (among other psychological principles)

>longer the recession the more apt it is to raise the liquidity preference, meaning the rates for long-term investments
obviously there are more factors in play here than just liquidity preference. Longer recession might give higher long term interest rates because people believe that we will soon get out of the recession and we will start to see higher ROI.

>Longer recession might give higher long term interest rates because people believe that we will soon get out of the recession and we will start to see higher ROI.
Exactly what I was thinking. And you know, this probably just depends on what phase of the economic 'slump' you're in. Mid to late in the slump, what you're saying generally happens. The duration of the slump usually depends on the longevity of capital assets, the rate of capital growth, and the rate of investment.

>Considering in Keynes' quantity of money theory
Considering past economists had so many different in interpretations of money supply, interest rates, inflation. Its a small miracle economics is a semi-comprehensive field with any agreement at all.

You're right. Have you read the whole book? I am almost finished, just read chapter 23. It was an incredible one, and I think it helps me understand Keynesian theory a bit more. He was extremely well read, such a great economist. Now in my mind, it's hard to believe, but he seems to agree with Malthus fundamentally on a point Ricardo differed on.

This is going to be shooting for the moon, but can you give me any indication on what this might have been?

no freaking clue, i've read like half of it years ago , but at the time i was a noob in economics. I think I learned most of its contents in class though. But I definitely should reread it now that i know more.

Well have you read Ricardo or Malthus?

No, i read smith, J.S. Mill, Shumpeter Hayek and some Marshall and Fisher from the 'early' economic thinkers. While they are an interesting read, often they will talk in detail about some disagreement that has long been settled, like what determines wages, interest rates etc. Or talk in depth about fundamentals of an idea you learned from modern textbook in 2 paragraphs- seriously like 3 chapters in Fisher's theory of interest talk about Quantity theory of money. They are way too long to read and I chose to focus on more current issues, mainly monetary econ and finance.

It seems like the quantity theory of money was something that almost every single early 20th century economist disagreed with. But it was simply because it was a simplistic view. The Neoclassical, Keynesian, and Austrian schools all disavowed it.

That's a great list though man. J.S. Mill is great. What did you read from him? He is an excellent thinker, very in depth.

Ive read Utilitarianism and On Liberty. Its quite interest to think, which side of political spectrum old economic thinkers like Mills would fall under. Because even though he said free markets are generally good, he also claimed that government wealth redistribution is not necessarily against the principle of free makret. Would he be some Krugman-esque type democrat or a libertarian who supports some welfare?

>wealth redistribution
meant income redistribution.

And to add another example- on education Mills argued that private schools are better than public because the curriculum is not devised by the government, but by many different people, which is sort of a non-argument in today's world because most curriculum even among different developed countries are the same. So if we take that away, would he have argued for private education?

Yeah back in those days they didn't think too too much about the political spectrum. Probably for the best if you ask me.

He was huge on one of my favorite things to mention in comments about economics: redistribution of inheritance. You see, Mill liked productivity. He had a beautiful view of productivity in general, one of my favorite views towards inherent productivity and it is a definite lens that Keynes views economics through, for instance, but some economists do not.

He advocated, or at least entertained the possibility of, socialist systems. That weren't communism. Silvio Gesell, the economist who Keynes has a giant hard-on for, did the same thing in the early 20th century from a Geoist viewpoint. Communism is probably the worst form of socialism from what I understand.

Still, you're right, Mill didn't find any problem with the economy as it functioned. But the funny thing is, although the quantity theory of money is largely incorrect these days because of globalization, foreign trade accounts in banks, current accounts, and inconvertible paper currencies, in the Mercantilist age, the quantity theory of money has a much better and fuller, application.

In Principles of Political Economy, he allows for the government expenditure for public education as a necessary evil, however he says that private teaching should never be discouraged. Does he take a hardline stance on this in On Liberty? Because if so he changed his mind considerably. However, he always was for private education either way. The state of affairs most likely should not be the way it is today, in my opinion, that is for sure.

>quantity theory of money has a much better and fuller, application.
I disagree to a point. Broadly QTM as in m*v=p*t is almost irrefutable even in modern age. Now maybe the relationships between m at p and v and t change, got more complicated, but at the end of the day, if you increase money supply holding velocity constant you will get inflation. I think the issue comes from the change of paper/physical money to a more debt based system, where you have this double good of stable inflation(through increases in debt borrowing) and increase in gdp in upturn to double bad of deflationionbary pressures(through less debt being created) and fall in GDP in downturn. This causes a great deal of problems for the central banks to efficiently control inflation.

The rest of the post was a good read

yes, he takes the free market=completion, so private schools will inevitably be better than public. Which I agree with, but free makrets are not the only way of increasing competition. I think the best applications of modern economists is to introduce competitive incentives into public or regulated industries that face makret failures due to some exploitation in the system. Great example is recent Canada's decision to adjust royalties to natural gas and oil producers according to the extraction difficulty of the resource(previously you basically earned way more money if you simply got easier-to-extract well)

So I haven't read too many modern economists. Are you telling me economists across the board disagreed with quantity theory at the beginning of the 20th century and then recently reversed their viewpoint??

On the topic of inflation, there are differing arguments for when inflation really begins. Just because you are experiencing decreasing marginal efficiency of capital doesn't mean too much of a worsening trend for the value of money because the higher marginal efficiency of capital of other industries will garner the attention of the market. True inflation, in Keynes eyes, is when the output doesn't increase in relation to the increase of effective demand, so that the ostensible price increase resulting from increasing output is spent entirely on the increasing marginal prime cost of the goods produced.

The Quantity theory of money, on another note is dependent on so many different factors, Keynes has formed his entirety of his economic work on showing that the general elasticity of the economy as a whole, does not fit into the quantity of money theory, because so many elasticities need to change to 1 or 0 for it to hold true (so it's quixotic)

>the beginning of the 20th century and then recently reversed their viewpoint
thats exactly right. Monetarist's greatest contribution to the modern economics was to see inflation as a purely monetary phenomena (exception is supply shocks like oil price increase in 1973). See mankiw's princuples of micro economics- 9th principle is Prices Rise When the Government
Prints Too Much Money
>What causes inflation? In almost all cases of large or persistent inflation, the
culprit is growth in the quantity of money


> True inflation, in Keynes eyes is when the output doesn't increase in relation to the increase of effective demand
here we come to a disagreement between Keynes and how modern economists calculate inflation. They do so by literally taking prices year-by-year, weighing them and comparing them to last year. And I thinm you can see that Keynes's 'true inflation' is impossible to effectively measured and is more of a measure of how productivity effects prices rather than prices level in general.
QTM doesn't really care about general elasticies. except how velocity of money is related to supply of money, and if you take that either, its negatively correlated(as theorized by fischer) or positively correlted does not matter. The way QTM could be false is if velocity of money is random or perfectly correcting for changes in money supply- that money is neutral in both long and short term.

I'll grant you the concession towards Keynes view of inflation. Now...
>QTM doesn't really care about general elasticies.
I know, but when an entire economic system is built around the money increase in terms of price over the price increase in terms of money being based on the elasticity of several different variables, it deserves a mention and even the spotlight, because reconciling the truth of the Quantity theory of money is impossible under his system. Or only possible under extremely exceptional circumstances.

But this brings to a Keyne's wrong assumption that inflation and unemployment are always inversely related and when you have high inflaton you will also have high emplyment- AKA the Phillips curve, which is no longer used today because the phenomena of stagflation, where you can be 1. under full emplyment and 2. have high inflation(there are many criticisms of the Phillips curve, rational expectation being the most popular).

True inflation does not happen under periods of high employment under Keynesianism strictly, though. I mean it could, but the wonder of attributing values to concepts and then introducing linear functions into an economic framework is that it is fun and easy to toy with.

For instance, consider this hypothetical. The amount of workers is small relatively to what it's been. Labor is scarce. Wages are set very high in this case. The output from a particular company is reaching a Keynesian 'bottleneck' because of the lack of available resources to trade or convert. The price increases relative to the marginal cost-unit for that good as it approaches the bottle-neck. Now you would say, that this is a period of true inflation. But employment is far from being high.

If you're talking about percentage of workers overall, you could just as easily apply this to an industry where the unions or regulations raised the worker's wages very high and the sharply increasing marginal cost-unit gives a very sharp slope for the diminishing returns, causing production of the goods to cease entirely after a certain point. The increase of the price at this point is simply to divert customers away from the industry this particular good is in.

In either case, this would be Keynesian inflation. And it would affect the entire economy, even if it originated from one industry.

Fund public works, do it now

Or, just generally speaking, public institutions.