Keynes and Hayek Agree After All! Dean Baker weighs in . . .

The following is from Dean Baker, the, er, Dean of left-wing economists, at his Center for Economic and Policy  Research blog.  Now this guy is quoted more often than Paul Krugman, and in the New York Times to boot.  But the wonderful thing is that he agrees completely with Mr. Boudreaux, the theologian over at Cafe Hayek–of course saving and investment decline proportionally as an economy matures, what, don’t you know anything about economic theory, or history?  “This [rise of consumption] doesn’t change the fact that it is investment, not consumption, that provides the basis for productivity gains which will make the country wealthier in the future.”  Memo to Livingston: Stop trespassing where you’re an amateur without access to the right numbers.  Jeez, wouldja just get out of our way?

To which I say: try harder, Dean.  Try thinking, for a change, in a way not dictated by your training, your degree, and your professional dignity.  To begin with, I’m focused on the atophy of net private investment.  That’s the fundamental economic change inscribed in the 20th century, as first noted by Simon Kuznets, then measured and pondered by the Nobel Prize-winning likes of Robert Solow, but also economists such as Moses Abramovitz, Solomon Fabricant, Anatol Murad, Harold Vatter, Kenneth Kurihara, B.F. Massell, and many, many others.

It is meaningless to say that “investment, not consumption, provides the basis for productivity gains.”  First, government spending is now counted in the National Income and Product Accounts as investment, and so is “residential investment”–and neither requires, or even allows, the profit motive that drives business.  The latter is consumer spending, the former is typically spending on R & D, services, or human capital (when it is not military spending, a form of capital consumption).   Second, there is now a substantial body of literature showing that private investment follows the consumer demand curve, not the other way around.  Without rising consumption, no “investment” from any quarter–not from government, not from home buyers, not from all those start-ups that want to sell you the latest electronic device and its killer apps.  Third,since the 1920s, the mere replacement and maintenance of the existing capital stock has been sufficient to improve labor productivity and increase output–so yes, gross investment has been more or less steady, but net private investment has meanwhile declined precipitously (20% between 1900 and 1930, steeper declines thereafter, and this while labor productivity and industrial output increased spectacularly).

But hey, you read the Dean for yourself and you decide.  What I want you to notice, baby, is the consensus on the significance of private investment that unites Baker and Boudreaux, allowing Keynes and Hayek to kiss and make up after all these years.  I also want you to notice that the most radical implication of my argument goes missing in the “technicalities.”  I’m saying we don’t need capitalists to collect our savings and allocate resources–to determine our economic future.  We can do without the profit motive, or rather we can revise it to include social goals that reach beyond the highest return to investors.  That’s the forest these people can’t see.  It will remain a trackless wilderness until they stop counting the trees.


DEAN BAKER, co-director of the Center for Eonomic and Policy Research.

Wednesday, 26 October 2011 08:17

I’m not ordinarily one to complain that a person is not an economist, but when one writes on economics, it does help to have some familiarity with the topic. That does not seem to be the case with the NYT column by James Livingston touting the merits of more consumption.

While part of the story sounds very good — reverse the upward redistribution from wages to profits — some of the rest does not make sense. Yes, consumption has grown more than investment over the last century. That happens in every country as it develops. When it is poor, there is a real focus on building up the capital stock to get richer, which means that investment will be a very high share of GDP.

In China investment accounts for close to 50 percent of GDP now, compared to around 20 percent in the U.S. However, as China moves from a rapidly developing country into being a wealthy country, its consumption share of income will almost certainly rise, as was the case with the U.S. and other wealthy countries. This doesn’t change the fact that it is investment, not consumption, that provide the basis for productivity gains which will make the country wealthier in the future.

Also Livingstone tells us that we should not worry about the large trade deficit because many of the goods we import are made by U.S. owned companies. I understand how this helps the shareholders in these companies, but I can’t see what this does for the rest of us
The basic accounting identity here is inescapable. If we have a large trade deficit then must have either large budget deficits or negative private saving or some combination of the two. Over the long-run, that is not a pretty picture.

Oh, and about that trade deficit thing.  It has no bearing on the argument whatsoever.  The hub of a centrifugal world trading system has to run a trade deficit, as the UK did in the 19th century.  No way around it.  We can offset it–if we choose–by inducing the repatriation of profits, but then we’ll have to pay close attention to their distribution.



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4 responses to “Keynes and Hayek Agree After All! Dean Baker weighs in . . .

  1. William Neil

    Spirited and well done Mr. Livingston. Even Center-Right economists, like Martin Wolf, have noted the decline of private investment here in the US as the likely culprit in the “savings glut vs. overconsumption” argument over the great international trade imbalances, in his book “Fixing Global Finance,” 2008.

    It’s much tougher to get at the causes of the lack of investment, and weighing how important it is compared to other factors. Was it not Keynes position that as the overall economic “climate” deteriorated, the propensity of businesses to save, to hoard even, the “flight to safety,” goes up, and investment-risk taking goes down? If the prospects for consumer spending look dim,as they do now in the West, due to the debt overhang (See Roubini and two others, “The Way Forward, oct., 2011, New America Foundation), unemployment, and the general “austerity” regime, its no surprise that investment, whatever the deeper trends behind the long term decline, will stay down.

    As to the accounting conventions which say that if you run a trade deficit,as we do with China, then the nation with the deficit must either run a federal budget deficit or the private secctor (businesses and consumers, one or the other or both) must also go into debt, was handled at some length in James Galbraith’s “The Predator State,” and I have written that Martin Wolfe, in his book mentioned above, seems to agree with the dynamic, and Galbraith fills in the past 25 years or so to track the federal deficits and trade relationships. But is this too mechanical an equation, evading the deeper causes?

    Would like to hear more from Professor Livingston, if he is familar with these works, and especially his thoughts on “The Way Forward” by Roubini, Daniel Alpert, and Robert Hockett, which is perhaps the most extensive grand survey on the dismal state of the US and the world economy out there – at least in a 35 page PDF form. I agree with its assessment; the recommendations and the lack of poltical force powerful enough to carry them out is another matter. And I might add that one can get to their assessments from any number of philosophical and economic schools of thought, dare I write varities of political economy, theirs being Center and perhaps slightly left of center, but not too far. But even the Democrats wouldn’t touch this assessment, which calls for setting aside balanced budget/debt obsessions for 5-7 years, something I have called for over the past two years in a number of essays, which really says something about the state of politics.

  2. Thanks for this thoughtful response. I found Roubini’s Crisis Economics dissatisfying for the same reasons Arrighi’s and thus Harvey’s explanations of everything are–“financialization,” too much credit. The prior question is, how does the surplus capital get generated? By my accounting, that surplus is occasional and mostly sectoral until very late in the 19th century, when it becomes a chronic problem. Then in the 1920s it becomes an acute problem because profits become redundant–they’re not needed to augment the existing capital stock and improve productivity via reinvestment because new plant costs less than the old, and, more important, you can increase productivity and output through mere replacement and maintenance of your fixed assets. What then? Where do you look to invest?

    The causes of the lack of PRIVATE investment boil down, in my view, to this: it’s not needed to fuel growth.

    The trade deficit can’t be addressed with textbook equations. It’s a real-time, historical problem. We’ll run a trade deficit with China as long as it takes to bring that country into the fold of free trade, an open-door world. And who says that deficit can’t be balanced by export surpluses with other trading partners?

    I like your ecumenical approach, it’s true, you can get to where we are on the question of austerity by many routes.

  3. William Neil

    I can imagine that your trend of analysis is more than a little frightening not only to mainstream and conservative economists, “‘scientific’ economists” as well as market ideologues but also to heirs of Marxist analysis on the left. Are you not adding new “enigmas” to Harvey’s “Enigma of Capital,” or does your analysis not threaten that 3% growth rate in capital that he sees necessary to keep the process going? Doesn’t your analysis also imply, indirectly if not more overtly, that since new equipment in an old plant is both cheaper and more efficient, that the “remaining labor” could now take a higher share of profits, because it costs less for “investment,” whether its called gross or net, new or replacement?

    It would seem that your work touches on very old nerves for the entire spectrum of the political economy: less worry on both sides about that “falling rate of profit,” and charging that labor’s share of the “surplus” has been expropriated, and both sides angry that the old, “purer” views of purely private investment now might no longer drive the system?

    But I also suspect that labor itself, the need of humans for jobs for income and meaning, is still being displaced by an intensification of the old worries of technological displacement. And then there is still the phenomenon of business chasing, rightly or wrongly, the lure of those distant and giant untapped markets, China, India…now Egypt..have you also displaced the claim that in the end, “profits” are higher there, overseas?

    And overall, your work would seem, under current conditions, to argue for more of a social investment process, rather than an entirely private one. And we know that that implication will be so warmly received in boardrooms around the world, right?

  4. Agreed on every count, the socialization of investment is the key last move of the book. Thanks again, this is very clarifying for me, and encouraging too because you’ve made sense of the well-nigh universal resistance to the argument.

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