Keynes on the Fisher Equation and Real Interest Rates

Almost two months ago, I wrote a post (“Who Sets the Real Rate of Interest?”) about the Fisher equation, questioning the idea that the Fed can, at will, reduce the real rate of interest by printing money, an idea espoused by a lot of people who also deny that the Fed has the power to reduce the rate of unemployment by printing money. A few weeks later, I wrote another post (“On a Difficult Passage in the General Theory“) in which I pointed out the inconsistency between Keynes’s attack on the Fisher equation in chapter 11 of the General Theory and his analysis in chapter 17 of the liquidity premium and the conditions for asset-market equilibrium, an analysis that led Keynes to write down what is actually a generalized version of the Fisher equation. In both of those posts I promised a future post about how to understand the dynamic implications of the Fisher equation and the relationship between Fisher equation and the Keynesian analysis. This post is an attempt to make good on those promises.

As I observed in my earlier post, the Fisher equation is best understood as a property of equilibrium. If the Fisher equation does not hold, then it is reasonable to attribute the failure to some sort of disequilibrium. The most obvious, but not the only, source of disequilibrium is incorrectly expected inflation. Other sources of disequilibrium could be a general economic disorder, the entire economic system being (seriously) out of equilibrium, implying that the real rate of interest is somehow different from the “equilibrium” rate, or, as Milton Friedman might put it, that the real rate is different from the rate that would be ground out by the system of Walrasian (or Casselian or Paretian or Fisherian) equations.

Still a third possibility is that there is more than one equilibrium (i.e., more than one solution to whichever system of equations we are trying to solve). If so, as an economy moves from one equilibrium path to another through time, the nominal (and hence the real) rate of that economy could be changing independently of changes in expected inflation, thereby nullifying the empirical relationship implied (under the assumption of a unique equilibrium) by the Fisher equation.

Now in the canonical Fisherian theory of interest, there is, at any moment of time, a unique equilibrium rate of interest (actually a unique structure of equilibrium rates for all possible combinations of time periods), increasing thrift tending to reduce rates and increasing productivity of capital tending to raise them. While uniqueness of the interest rate cannot easily be derived outside a one-commodity model, the assumption did not seem all that implausible in the context of the canonical Fisherian model with a given technology and given endowments of present and future resources. In the real world, however, the future is unknown, so the future exists now only in our imagination, which means that, fundamentally, the determination of real interest rates cannot be independent of our expectations of the future. There is no unique set of expectations that is consistent with “fundamentals.” Fundamentals and expectations interact to create the future; expectations can be self-fulfilling. One of the reasons why expectations can be self-fulfilling is that often it is the case that individual expectations can only be realized if they are congruent with the expectations of others; expectations are subject to network effects. That was the valid insight in Keynes’s “beauty contest” theory of the stock market in chapter 12 of the GT.

There simply is no reason why there would be only one possible equilibrium time path. Actually, the idea that there is just one possible equilibrium time path seems incredible to me. It seems infinitely more likely that there are many potential equilibrium time paths, each path conditional on a corresponding set of individual expectations. To be sure, not all expectations can be realized. Expectations that can’t be realized produce bubbles. But just because expectations are not realized doesn’t mean that the observed price paths were bubbles; as long as it was possible, under conditions that could possibly have obtained, that the expectations could have been realized, the observed price paths were not bubbles.

Keynes was not the first economist to attribute economic fluctuations to shifts in expectations; J. S. Mill, Stanley Jevons, and A. C. Pigou, among others, emphasized recurrent waves of optimism and pessimism as the key source of cyclical fluctuations. The concept of the marginal efficiency of capital was used by Keynes to show the dependence of the desired capital stock, and hence the amount of investment, on the state of entrepreneurial expectations, but Keynes, just before criticizing the Fisher equation, explicitly identified the MEC with the Fisherian concept of “the rate of return over cost.” At a formal level, at any rate, Keynes was not attacking the Fisherian theory of interest.

So what I want to suggest is that, in attacking the Fisher equation, Keynes was really questioning the idea that a change in inflation expectations operates strictly on the nominal rate of interest without affecting the real rate. In a world in which there is a unique equilibrium real rate, and in which the world is moving along a time-path in the neighborhood of that equilibrium, a change in inflation expectations may operate strictly on the nominal rate and leave the real rate unchanged. In chapter 11, Keynes tried to argue the opposite: that the entire adjustment to a change in expected inflation is concentrated on real rate with the nominal rate unchanged. This idea seems completely unfounded. However, if the equilibrium real rate is not unique, why assume, as the standard renditions of the Fisher equation usually do, that a change in expected inflation affects only the nominal rate? Indeed, even if there is a unique real rate – remember that “unique real rate” in this context refers to a unique yield curve – the assumption that the real rate is invariant with respect to expected inflation may not be true in an appropriate comparative-statics exercise, such as the 1950s-1960s literature on inflation and growth, which recognized the possibility that inflation could induce a shift from holding cash to holding real assets, thereby increasing the rate of capital accumulation and growth, and, consequently, reducing the equilibrium real rate. That literature was flawed, or at least incomplete, in its analysis of inflation, but it was motivated by a valid insight.

In chapter 17, after deriving his generalized version of the Fisher equation, Keynes came back to this point when explaining why he had now abandoned the Wicksellian natural-rate analysis of the Treatise on Money. The natural-rate analysis, Keynes pointed out, presumes the existence of a unique natural rate of interest, but having come to believe that there could be an equilibrium associated with any level of employment, Keynes now concluded that there is actually a natural rate of interest corresponding to each level of employment. What Keynes failed to do in this discussion was to specify the relationship between natural rates of interest and levels of employment, leaving a major gap in his theoretical structure. Had he specified the relationship, we would have an explicit Keynesian IS curve, which might well differ from the downward-sloping Hicksian IS curve. As Earl Thompson, and perhaps others, pointed out about 40 years ago, the Hicksian IS curve is inconsistent with the standard neoclassical theory of production, which Keynes seems (provisionally at least) to have accepted when arguing that, with a given technology and capital stock, increased employment is possible only at a reduced real wage.

But if the Keynesian IS curve is upward-sloping, then Keynes’s criticism of the Fisher equation in chapter 11 is even harder to make sense of than it seems at first sight, because an increase in expected inflation would tend to raise, not (as Keynes implicitly assumed) reduce, the real rate of interest. In other words, for an economy operating at less than full employment, with all expectations except the rate of expected inflation held constant, an increase in the expected rate of inflation, by raising the marginal efficiency of capital, and thereby increasing the expected return on investment, ought to be associated with increased nominal and real rates of interest. If we further assume that entrepreneurial expectations are positively related to the state of the economy, then the positive correlation between inflation expectations and real interest rates would be enhanced. On this interpretation, Keynes’s criticism of the Fisher equation in chapter 11 seems indefensible.

That is one way of looking at the relationship between inflation expectations and the real rate of interest. But there is also another way.

The Fisher equation tells us that, in equilibrium, the nominal rate equals the sum of the prospective real rate and the expected rate of inflation. Usually that’s not a problem, because the prospective real rate tends to be positive, and inflation (at least since about 1938) is almost always positive. That’s the normal case. But there’s also an abnormal (even pathological) case, where the sum of expected inflation and the prospective real rate of interest is less than zero. We know right away that such a situation is abnormal, because it is incompatible with equilibrium. Who would lend money at a negative rate when it’s possible to hold the money and get a zero return? The nominal rate of interest can’t be negative. So if the sum of the prospective real rate (the expected yield on real capital) and the expected inflation rate (the negative of the expected yield on money with a zero nominal interest rate) is negative, then the return to holding money exceeds the yield on real capital, and the Fisher equation breaks down.

In other words, if r + dP/dt < 0, where r is the real rate of interest and dP/dt is the expected rate of inflation, then r < –dP/dt. But since i, the nominal rate of interest, cannot be less than zero, the Fisher equation does not hold, and must be replaced by the Fisher inequality

i > r + dP/dt.

If the Fisher equation can’t be satisfied, all hell breaks loose. Asset prices start crashing as asset owners try to unload their real assets for cash. (Note that I have not specified the time period over which the sum of expected inflation and the prospective yield on real capital are negative. Presumably the duration of that period is not indefinitely long. If it were, the system might implode.)

That’s what was happening in the autumn of 2008, when short-term inflation expectations turned negative in a contracting economy in which the short-term prospects for investment were really lousy and getting worse. The prices of real assets had to fall enough to raise the prospective yield on real assets above the expected yield from holding cash. However, falling asset prices don’t necessary restore equilibrium, because, once a panic starts it can become contagious, with falling asset prices reinforcing the expectation that asset prices will fall, depressing the prospective yield on real capital, so that, rather than bottoming out, the downward spiral feeds on itself.

Thus, for an economy at the zero lower bound, with the expected yield from holding money greater than the prospective yield on real capital, a crash in asset prices may not stabilize itself. If so, something else has to happen to stop the crash: the expected yield from holding money must be forced below the prospective yield on real capital. With the prospective yield on real capital already negative, forcing down the expected yield on money below the prospective yield on capital requires raising expected inflation above the absolute value of the prospective yield on real capital. Thus, if the prospective yield on real capital is -5%, then, to stop the crash, expected inflation would have to be raised to over 5%.

But there is a further practical problem. At the zero lower bound, not only is the prospective real rate not observable, it can’t even be inferred from the Fisher equation, the Fisher equation having become an inequality. All that can be said is that r < –dP/dt.

So, at the zero lower bound, achieving a recovery requires raising expected inflation. But how does raising expected inflation affect the nominal rate of interest? If r + dP/dt < 0, then increasing expected inflation will not increase the nominal rate of interest unless dP/dt increases enough to make r + dP/dt greater than zero. That’s what Keynes seemed to be saying in chapter 11, raising expected inflation won’t affect the nominal rate of interest, just the real rate. So Keynes’s criticism of the Fisher equation seems valid only in the pathological case when the Fisher equation is replaced by the Fisher inequality.

In my paper “The Fisher Effect Under Deflationary Expectations,” I found that a strongly positive correlation between inflation expectations (approximated by the breakeven TIPS spread on 10-year Treasuries) and asset prices (approximated by S&P 500) over the time period from spring 2008 through the end of 2010, while finding no such correlation over the period from 2003 to 2008. (Extending the data set through 2012 showed the relationship persisted through 2012 but may have broken down in 2013.) This empirical finding seems consistent with the notion that there has been something pathological about the period since 2008. Perhaps one way to think about the nature of the pathology is that the Fisher equation has been replaced by the Fisher inequality, a world in which changes in inflation expectations are reflected in changes in real interest rates instead of changes in nominal rates, the most peculiar kind of world described by Keynes in chapter 11 of the General Theory.


27 Responses to “Keynes on the Fisher Equation and Real Interest Rates”

  1. 1 Ray Newton September 3, 2013 at 12:32 am

    First, I will start my first response by addressing your analogy used to close your last commentary (‘academic’ paper).

    You wrote:-

    “….Of course, whether the private sector is stable is itself a question too complicated to be answered with a simple yes or no. It is one thing for a car to be stable if it is being steered on a paved highway; it is quite another for the car to be stable if driven into a ditch….”

    I choose this because it encapsulates the main point to my arguments here.

    It is the instability of the car while it is being driven on the highway that causes it to end up in the ditch where it, by the first law of Newtonian physics on motion, brings it to final stability – unless it is half hanging over an edge where the elements acting upon it could tip the balance.

    Fortunately we have created an accident investigation ‘profession’ as part of law enforcement, that, to ascertain culpability, seeks first the reason why it became unstable to end up in the ditch. This involves first looking for the ‘why’ in the mind of the driver.

    .After first excluding an act of God – hurricane unexpectedly bringing tree crashing onto roadway, they turn to the human cause. This is rarely due to the driver ‘not knowing the rules’ of the road, and sometimes it is not the failing of the driver. Maybe someone ‘fixed’ the car intentionally, or by carelessness during manufacture, or last service,

    However, one waste of effort they do not engage in is questioning Newton’s findings on laws of motion about what caused the cars first meanderings (instability) causing it to end in the ditch, and why it came to rest (stable) once it was in the ditch. I could think of more analogies on time and effort wasting, some based on ‘theories’ attacking ‘theories’ of why Newton could be ( even as some might believe in order to make a name for themselves ‘is’) wrong.

    Oh, one could string it out for years, even centuries, like economists, if permitted.

    I contend that it is not difficult in economics by retracing, as one does to find the source of a river, to find out where culpability in mismanagement lies. The hard part, it turns out, is finding sufficient economists to dig deep, and expose, the reason WHY! They do not like getting their ‘hands soiled’. Much better to make few waves, and sound erudite by continuing academia’s claptrap pseudo scientific jargon that chases its tail around a tree of irrelevance – long after the required degree, to make it possible, has been acquired.

    I again quote the famed economist – Freidrich August von Hayek

    “….“….I have arrived at the conviction that the neglect by economists to discuss seriously what is really the crucial problem of our time is due to a certain timidity about soiling their hands by going from purely scientific questions into value questions……”

    At school, we boys had a saying that in order to assert dominance in argument – blind them with science. This has enabled me in life to recognise the practice when used by others by accident or design.


  2. 2 Ray Newton September 3, 2013 at 12:54 am

    If you find the above too difficult to understand ‘one word’ of it, then try my response to Tom – my last posting on the previous blog topic. I trust that together they provide some clarity.

    Incidentally, there are posts on the earlier topic still unaddressed. One is where I asked for a link to your commentary you claimed you had made earlier where you had earlier explained your reasoning for rejecting a point I had just made It related to the oil price, and gold price ratio..


  3. 3 Ray Newton September 3, 2013 at 6:40 am

    I put my point another way, by connecting it to the current financial debacle
    reaching its tentacles in every corner of our world – with still yet more to come, on that we can bet our bottom dollar.

    I trust you will accept with me that the chairman of the Fed (all of them past and present) along with the chairmen, and subordinates of all the Central Banks would be familiar with the ‘rules of the road’ (basic economics – even advanced level, though even basic would be sufficient)

    So, all, or most of these ‘theories’ would be known,

    So, to argue the point about whether this or that theoretical equation is preferable to another is hardly relevant when looking at an event ( I do not use the term ‘crisis’ because that relates to a point of view) on such a large scale.

    Now if just one banker had ignored the rules, or merely lost the plot, we could quickly identify the ‘equation’ (I use this term because it seems so relevant to your prognosis), he used, have him certified, or at least, replaced. The damage would be contained, it would also bring to light to all others what happens when common sense, which is all what basic economics – an understanding of the rule of supply and demand requires, is bypassed.

    But when we have the whole banking fraternity acting in unity to effect the most devastating world wide cause, and getting away with it themselves with impunity (even rewarded) then please tell me what meaningful service is performed by looking at what Keynes thought about Fisher or whomever.

    No, I know it won’t stop you, or change you.-to observe, and reason, is not what attracts to the profession. But, when you are not taken seriously, and more cynical jibes are added to the long list, that places you at a level with weather forecasters, please do not ask for whom the bell tolls………


  4. 4 Greg Hill September 3, 2013 at 8:30 pm


    You write, “In chapter 11, Keynes tried to argue the opposite: that the entire adjustment to a change in expected inflation is concentrated on real rate with the nominal rate unchanged. This idea seems completely unfounded.”

    The idea is “completely unfounded,” but I’m pretty sure it’s not Keynes’s idea (citations would be helpful). Keynes’s point in, in this regard, is that changes in expected inflation affect investment, not through changes in the rate of interest, but through changes in the marginal efficiency of capital. Now, Keynes may have assumed that the effect of an increase in expected inflation would have a greater effect on MEC than it would have on the rate of interest, but that’s different than saying that changes in expected inflation only affect the real rate of interest, leaving “the nominal rate unchanged.”

    Insofar as Keynes was critical of Fisher, he had two complaints: 1) Fisher didn’t clearly delineate the case in which inflation is foreseen from the case in which it isn’t; and 2) the interest rate doesn’t balance the flows of saving and investment, but reflects changes in the proportion of bulls to bears, i.e., those who think bond prices will rise and those who believe they will fall. For better or worse, the “fundamentals” of productivity and thrift are given short shrift in the GT.


  5. 5 Blue Aurora September 4, 2013 at 5:47 am

    Out of curiosity David Glasner, have you ever tried comparing and contrasting the arguments found in Chapters 20 and 21 of The General Theory with the arguments found in Chapter 17? IIRC, Chapter 21 provides an interesting contribution to monetary economics that is arguably better than what is found in Chapter 17.


  6. 6 Kevin Donoghue (@Paddy_Solemn) September 4, 2013 at 6:27 am

    “…the Hicksian IS curve is inconsistent with the standard neoclassical theory of production, which Keynes seems (provisionally at least) to have accepted when arguing that, with a given technology and capital stock, increased employment is possible only at a reduced real wage.”

    The only bit of neoclassical production theory Keynes accepted was price = marginal cost or equivalently real wage = marginal product of labour. (He had reservations about this relating to user cost but hopefully we don’t need to go into that.) He never (in the GT at least) seriously commits himself to any notion relating to the marginal product of capital, in fact the only explicit reference I can recall to that concept is a disparaging one. So I can’t see any problem in deriving an IS curve from Keynes’s assumptions.


  7. 7 David Glasner September 4, 2013 at 9:17 am

    Ray, Thanks for the reprimand, but, really, how long will it take you to figure out that I am hopelessly incorrigible? Sorry to be that way, but it is what it is.

    And, while I am in an apologetic mood, here’s the link to the post you asked for.

    Greg, I discussed the text in chapter 11 in an earlier post

    In that post I argued that it is obvious that Fisher was talking about expected inflation and that Keynes was either obtuse or coy in suggesting that there some ambiguity about that. Keynes does raise a tricky problem, but I don’t think that he properly reasons through it. See the earlier post. My discussion in this post is not aimed at parsing Keynes’s language in chapter 11, but at providing what seems to me an alternative approach, possibly (though not necessarily) consistent with Keynes’s overall view, of how to understand and apply the Fisher equation.

    Blue Aurora, It has been a long time since I read chapters 20 and 21. I need to reread them, but I doubt that I will be able to do so till Thanksgiving at the earliest.

    Kevin, You may be right that Keynes rejected neoclassical production theory (though the assertion that the real wage equals the marginal product of labor in equilibrium is not a trivial concession). But my point was not to argue one way or the other about Keynes and neoclassical production theory, just to ote that Keynes left a gap in his own theory and that Hicks filled the gap in a way that was inconsistent with neoclassical theory.


  8. 8 Kevin Donoghue (@Paddy_Solemn) September 4, 2013 at 10:14 am

    “…Keynes left a gap in his own theory and that Hicks filled the gap in a way that was inconsistent with neoclassical theory.”

    I’m struggling to see where the gap is. You say Keynes “concluded that there is actually a natural rate of interest corresponding to each level of employment.” It would be more accurate to say that he simply chucked the natural-rate concept in the bin:

    I am now no longer of the opinion that the concept of a “natural” rate of interest, which previously seemed to me a most promising idea, has anything very useful or significant to contribute to our analysis. It is merely the rate of interest which will preserve the status quo; and, in general, we have no predominant interest in the status quo as such.” (GT Ch 17)


  9. 9 Ray newton September 5, 2013 at 5:07 am

    David, I understand your problem well, as with all the others, especially as with all the ones that post here obviously so afflicted, and to whom you are magnet.. You can find consolation in knowing you are helping to perpetuate the profession’s addiction to engaging in much ado about nothing of consequence and to assisting the select few elite who understand real economics those who do not for their own benefit.

    I glanced at the link you gave and it truly confirmed your own views, and why, and how we got into such a mess.

    I leave you to your little fraternity here, to carry on doing whatever gives you satisfaction.

    Ciiao from Italy where I am spending some days away from city life in London .


  10. 10 Ray newton September 5, 2013 at 6:13 am

    Please excuse slight error in above due to using an unfamiliar foreign computer while here in Italy – just arrived last night.

    I am only able to enjoy many vacations because I took the trouble, after God provided the awareness, to study ‘real’ economics, from which I can now enjoy the benefits. I like the cliche ‘when you can’t beat them, join them’ at least, by following how they place their money, and the rules they use, not how they convince you to.


  11. 11 JP Koning September 5, 2013 at 11:01 am

    I don’t have much to contribute, except that this is a great post. It ties together a lot of different strands you’ve been working on in previous posts.


  12. 12 Roman P. September 5, 2013 at 11:34 pm


    Thanks for a great post, your writing is always thought-provoking. I think it is important to establish the causal links between the variables in the Fisher equation, because on its own it seems almost tautological. Most agree (and if I remember it correctly, you agree too) that the nominal rate of interest is set at discretion of a central bank: it sets a discount rate/interbank borrowing rate and banks mark that rate up to get to the prime interest rate. This rate influences the processes in the economy in some direction and we get some level of inflation. The real rates of interest are results of the various nominal interest rates and the rates of inflation in different sectors.

    I think that the most interesting question is how nominal interest rates influence the economy. If interest rates rise, what happens?
    1. The total amount of investment might get lower, but that is hardly a certainty: the higher rates of interest might make some projects unfeasible, but the literature (admittedly heterodox) argues that the amount of investment is mostly decided by the expectations of future demand.
    2. Some part of the increase of the nominal rates must manifest as cost-push inflation, but it will depend, as some blogger put it, on ‘the micro structure of the economy’. I think that amounts for a lot of observable inflation, but I didn’t see any concrete studies save for some works of Mau on Russian industry. But he is a Kaleckian, so YMMV.
    3. Something else?

    Am I right that you think that higher inflation is correlated with higher nominal rates, but that the causation mostly runs from the inflation through the MEC to the interest rates? And do you think it is needed at a ZLB (the situation in which Fisher equation becomes inequality) to try to push nominal rate upward to get ‘r’ out of the negative region? Trying to increase cost-push inflation sounds obviously bad in normal times, but in this situation it might get the economy out of debt deflation described by late Fisher.


  13. 13 Blue Aurora September 6, 2013 at 2:21 am

    Fair enough David Glasner, real life must take precedence.

    However, I would like to ask you a few things about your “Fisher Effect under Deflationary Expectations” piece.

    Was it always intended to only study recent events in history (i.e., the global financial crisis of 2007/2008 and its aftermath)?

    Cos’ I think that if you decided to extend the analysis, you should take a look at earlier periods in the economic history of the United States or even see if the economies of other nations (like say…that of the British economy, or the German economy, or the Brazilian economy, or the South Korean economy, or the Australian economy, or somewhere else) support your findings and arguments.

    Furthermore, have you considered using a more elaborate statistical analysis, besides merely running regressions?

    If you need the help of a person with an expertise in statistics, I wouldn’t be afraid to ask for his or her help if I were you. The techniques of non-parametric statistics might reveal more things about the data you have gathered for your research on the “Fisher Effect under Deflationary Expectations” piece than the standard use of regression.


  14. 14 David Glasner September 7, 2013 at 9:56 pm

    Kevin, The passage I am referring to appears in the paragraph above the one that you quote from:

    “I . . . overlooked the fact that in any given society there is, on this definition, a different natural rate of interest for each hypothetical level of employment. And, similarly, for every rate of interest there is a level of employment for which that rate is the “natural” rate, in the sense that the system will be in equilibrium with that rate of interest and that level of employment.”

    Sounds like the IS curve to me. But he doesn’t tell us anything about the slope of the curve.

    Ray, At this point, the only words that come to mind are

    “Tho’ I’ve belted you and flayed you,
    By the livin’ Gawd that made you,
    You’re a better man than I am, Gunga Din!”

    JP, Thanks, I really appreciate your comment, because that is exactly what I was trying to do.

    Roman P., Your comment, I think, illustrates a point that Scott Sumner has emphasized over and over again on his blog: Never reason from a price change. If you posit that the nominal interest rate changes, you can’t carry through the analysis in a coherent fashion without first specifying a prior change in the economic environment that caused the nominal rate of interest to change. If you don’t specify the reason for the change, you can go off in any direction or go around in a circle.

    At the ZLB, the idea is to get interest rates up, but the way to do that is not by cost-push (which to me suggests a negative supply shock) but by increasing aggregate demand.

    Blue Aurora, I am hoping to get back to the paper and extend the analysis and try some more advanced statistical tests than the simple regressions I performed, and I may try to enlist some more econometric expertise in that effort. The problem with going back to earlier time periods or other countries is that it would be hard (since I don’t believe they exist) to find a statistical time series for inflation expectations.


  15. 15 Ray Newton September 8, 2013 at 11:34 pm

    Gunga Din did not strive to be a ‘better man’, or think that he was, than that British soldier, he just tried to be the best he could be to himself and fellow man.

    We are conditioned to believe ‘we are` what eat But eating rice will not make you Chinese. We are what we THINK’, and consequently act.

    As a man thinketh, so is he.

    And you cannot fight successfully an enemy that has outposts in your head.

    Observing the ‘what’ is the first step, but reasoning the ‘why’ to its source, is the helpful key.


  16. 16 Ray Newton September 9, 2013 at 11:00 pm

    Here is something upon which, to me, economists should be focusing:- Facts:

    (1)People are living longer, helped by advances in medicine, and advances in technology in a number of areas that ease loneliness.

    (2) The world population, from ‘a numbers game’ is growing, helped by the above , and, in spite, of individual families, certainly in advanced nations, containing theirs.

    (3) Technology is removing the need for labour in many occupations. And new technology is being added for the same purpose, almost daily, as one speeds up the advances of the other.

    (4) Advances in communication, especially in visual, is making us aware of economic conditions (deprivation) in what has become known as the ‘third world’ (is there a second one?) This awareness disturbs our comfort zone.
    It has also made those suffering the deprivations aware of what can be available, and is enjoyed by others, causing malcontent, and demands.

    This condition is only going to get more acute unless some major change takes place.

    How, therefore, can we plan a more benign universal economic structure. I refer to one that can be readily, or should I say, reasonably, adopted, not something dreamed up to suit a world full of ‘born again Christians’ or ‘Wellsian’ Eloi’ or whatever,

    When an educated, observing, mind is put to work focusing on the problem within all its aspects, its enormity will be seen. It should also be observed that a plan has been devised, and is in progress.

    To me, in my humble position in the order of things, I feel that while I doubt
    economists outside the ‘inner sanctum’ could change the key elements, they could strive to ensure a possible more benign final outcome, and perhaps journey to it.

    Or, in the words of that Lennon song – ‘maybe I’m a dreamer………’


  17. 17 Ray Newton September 9, 2013 at 11:07 pm

    David, if there are serious errors In the above, please excuse, I am struggling in foreign parts, on a foreign computer and server. As no ‘editing’ facility is provided with this blog, one is unable to change anything once posted.


  18. 18 David Glasner September 11, 2013 at 9:04 am

    Ray, I encourage you to go on thinking great thoughts and I wish you look in disseminating them, but if you are expecting me to join you in that noble endeavor, I am afraid that you will almost certainly be disappointed.


  19. 19 Ray Newton September 11, 2013 at 1:17 pm

    David I thought you understood. I do not expect YOU to change. I read your profile, and you work for the government. It is like the military without the uniform. You are all small links in a long chain of command and you must follow the plan given whether it causes chaos, and achieves nothing positive or what (and it is usually ‘or what’).

    As Sir Henry Newbolt wrote ‘There’s is not to reason why, there’s is but to do and die.(Charge of the Light Brigade).

    But as you should know, there are far more than you know of who visit the blog. Very few bother to post. Maybe just one or two will see the folly of arguing about who agreed with, or liked who. And perhaps put their minds to greater endeavours. Thereby lifting this sham of a profession from the depths to which so much wasted time, and misguided effort has reduced it.

    Chiao (from Italy)


  20. 20 Ritwik September 11, 2013 at 4:18 pm

    Kevin, David

    Right after the passage that Kevin quotes, J M Keynes goes on to say :

    “If there is any such rate of interest, which is unique and significant, it must be the rate which we might term the neutral rate of interest,[10] namely, the natural rate in the above sense which is consistent with full employment, given the other parameters of the system; though this rate might be better described, perhaps, as the optimum rate.

    The neutral rate of interest can be more strictly defined as the rate of interest which prevails in equilibrium when output and employment are such that the elasticity of employment as a whole is zero.”

    In modern terminology, *the* natural rate of interest is that natural rate which corresponds to the natural rate of unemployment.

    As Leijonhufvud never tired of explaining, for Keynes equilibrium was Marshallian – partial, micro and static, but with no bearing on macro-dynamic optimality. A state from which the system shows no easy signs of moving, even though desired savings and desired investment are both being frustrated.

    Keynes says that he has no use for the *natural* rate, for it merely denotes a static Marshallian equilibrium, one of many. Then he acknowledges its other, deeper usage, rephrases *natural* to *neutral* and talks of the parametrically unique Walrasian equilibrium that is not being achieved.

    It’s really all there in Keynes. We can replace ‘natural’ by ‘neutral’. The Wicksellians will live. The Sraffians didn’t read very comprehensively.


  21. 21 greghill1000 September 11, 2013 at 5:03 pm


    I agree with most of your very interesting comment, but I think you’re being a bit unfair to the Sraffians in claiming they “didn’t read very comprehensively.” Not sure exactly who “the Sraffians” are, but Sraffa, himself, read quite comprehensively, as did Joan Robinson, Nicolas Kaldor, Luigi Passinetti, and several other critics of the neoclassical theory. By comparison, how many contemporary economists are familiar with the Cambridge capital debates, which put a logical kink in the IS curve?


  22. 22 Ray Newton September 13, 2013 at 1:51 am

    You see, David, this is the sort of pompous drivel about nothing of importance to which people who should know better devote their time in arguing and which does NOTHING to move the profession (if one can really attribute such a tag) into areas of productive concern.

    The writer above, Greghill 1000 (are there 999 lost souls somewhere?) says
    another poster is being unfair to the ‘Straffians’ , but yet admits, in the same breath, he doesn’t know who they are, in claiming they are not well read..

    Logically assuming ‘Straffians’ are followers of Straffa, they do not have to be ‘well read’. Christianity, Judaism, or any other ‘ism’ or collective gathering of mutual admiration of most of their followers, especially early ones that got them off the ground, had to be ‘well read’ – or even, able to read..

    Showing one is able to string two words together, and is ‘well read’ (or able to Google in our modern era) does not an economist make. Unless he wants to preach in Academia, where the flock will lap up anything to get their diploma. (been there, bought the T shirt)

    “I will not cease in mental fight, nor shall my sword sleep in my hand………”


  23. 23 Ray Newton September 17, 2013 at 6:51 am

    I reiterate David. There is nothing personal in my comments against you or any individual poster. You and they, are merely products of the system. It is against the system I aim my comments.

    It is not that I see myself as being right (I do really) and I am willing to accept any challenge to prove me wrong, provided it is well supported.

    I was always disturbed by the story of the ‘Pied Piper as how one man could
    lead so many to their doom. All I ask is to not follow the crowd just because you do not want to be left out. Stop, observe, and reason

    In a slightly different way, the point was made in ‘The Emperor’s New Clothes’. There are other examples.

    He was not an economist per se, but George Orwell told us more about how our future would be when the economy is in the hands of those who would (and do) control it for their own benefit first. He was only wrong on his timing.
    All as and is, coming to pass.

    Economics can NEVER be divorced from politics. And money power, controls politics. The system tells us EVERY DAY:


  24. 24 David Glasner September 29, 2013 at 9:08 am

    Ray, If the state of the world is as dire as you suggest, and if what takes place on this blog is as pointless as you seem to think, why do you keep wasting your obviously valuable time visiting the blog and writing numerous, lengthy comments to my posts and to the comments to my posts?

    Ritwik, Thanks. You summed it up very nicely and succinctly.

    Greg, Not I, that’s for sure.


  25. 25 Ray Newton September 30, 2013 at 2:57 am

    David, that comes across a little like – why do you not go away and leave me alone – please!

    I have explained my raison d’être, and it explains that there is nothing personal, or of malicious intent, however, it appears from your questioning
    you have chosen to ignore, or have not read.

    For answers, perhaps one should question why one really opens up a window to the world with a blog that invites comment, but finds challenges to that substance irksome. Does not ‘feedback’ that challenges assist in strengthening the substance by reasoned argument – or otherwise, as the case may be. The real waste of time, surely, is preaching only to the converted.

    Yes, some posters may question certain aspects of the topic that may appear as sound argument, yet merely questions what reality (as in practice) shows is irrelevant to the deepening key issues of the day – ones which cannot be overstated.

    To divert, otherwise astute minds, from these issues, and not exert, or at least guide them, to apply to them their personal observation, and not academia’s to seek solutions, is where there is a serious question of wasted time and energy to the detriment of all beyond any one nation’s borders..

    I will explain further in my posts which address your other comments to me, in your current update.


  26. 26 Ray Newton September 30, 2013 at 3:05 am

    Incidentally, David, I do not see our world as dire, otherwise I might be looking for a length of rope, as many have done with that point of view.

    In fact, I would not have chosen to live in any other period of world history. Take a peek, maybe, but live – Mais Non!


  27. 27 nafisa riaz October 28, 2015 at 12:39 pm

    can you please tell me why it is so that in fisher equation impact of inflation is considered?? why should saver be compensated for inflation when no other factor of production is compensated in the same period..


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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