Gene Callahan and Daniel Kuehn share their thoughts on the relationship between consumption and the Keynesian business cycle, with the essential take-away being that Keynesians emphasize the role of investment as much as any other school. I’m in broad agreement with both of them, and I echo Daniel’s concerns that an attack on Keynesianism which focuses on the “paradox of thrift” is bound to be misleading (Keynes wasn’t anti-savings). Yet, I don’t completely agree with them; consumption does play a bigger role in Keynesian theory that it does in some alternative theories, including Classical and Austrian business cycle theory.
Actually, Daniel mentions my point of contention, but I’m not sure he goes far enough when he writes,
The other thing is the multiplier — higher propensity to consume makes stimulus more effective. That’s of course a result of the slope of the consumption schedule, not because consumption is the primary issue.
I often harp on the differences between the Keynes–Kahn multiplier and the alternatives, such as Hayek’s Ricardo Effect and the more typical Classical relationship between investment and consumption. Keynes adopted the theory that the causality between consumption and investment suggests that higher levels of investment require higher levels of consumption, which is true in real terms (all final product must be consumed to make it worthwhile to produce) but not so much in nominal terms, at least according to those who disagree. The marginal propensity to consume (MPC) is largely a nominal figure (income minus savings), and not all macroeconomists agree that as the MPC falls the scope for investment also falls. (Edit: As I interpret it, the MPC determines the level of investment, because it determines the marginal efficiency of capital [MEC]. Others might also stress the role of input costs in determining the MEC.)
What does this have to do with Gene’s and Daniel’s points? While there are various explanations between Keynesians on the source of the business cycle — and I don’t think very many continue to adhere to a pure interpretation of The General Theory (even post Keynesians have seemed to adopt Minsky’s theory) —, at the most basic level most share the common characteristic that there is a disconnect between savings and investment. That is, idle savings leads to a reduction in the price level, causing the business cycle. There are two ways of restoring the price level: increase investment or increase consumption.
I agree that any characterization of Keynesians as economists who downplay the role of investment is wrong. Keynes stressed the importance of the “socialization of investment” under conditions where the market isn’t likely to intermediate savings to investors (e.g. when the MPC is relatively low); Keynes also advocated a reduction of interest to its lower bound, which clearly targets investment. Modern Keynesians stress the importance of public investment in infrastructure, oftentimes arguing that this, in turn, will increase private investment. Yet, none of this means that they interpret the roles of investment and consumption in exactly the same way as others.
Keynesians do emphasize the importance of consumption, and a major point they like to make during recessions is that consumption needs to rebound. An Austrian takes a very opposed position, where they favor savings over consumption for the sake of supporting the investment projects made during the boom (and a certain level of productivity). But, for the Keynesian it makes sense to support consumption-boosting programs, because a certain level of investment is directly related to a certain level of consumption. As such, even when it’s agreed that investment is low (which it is), a major cause of depressed investment, to the Keynesian, is depressed consumption.
Even though investment is still relevant in the Keynesian business cycle, I don’t think it’s totally unfair to call it a “consumption-based” theory. Consumption is a key determinant of private investment, and therefore is just as important in deciding the slope of the recovery. In this sense, I see Keynesian theory as unique (although, I’m a little wary of writing that since the “paradox of thrift” isn’t uniquely Keynesian).
There’s also room for considering “crude” Keynesianism, and, of course, “crude” economics, in general. As this post implies, approaching Keynesiansim as a consumption-only theory is wrong. But, Keynesians oftentimes don’t do much to dispel the error. Several Keynesian economists argue that “spending on anything” is good during periods of idle resources, which, in a sense, does away with the concept of opportunity cost (the only opportunity cost considered is that of leaving a resource idle, and it’s assumed that he value of that is zero and anything over zero is good — a strong assumption on idle resources to make). There’s also a lot of weight on the importance of maintaining “aggregate demand,” which I interpret as advocating the maintenance of a certain price level. This isn’t uniquely Keynesian, but whereas other schools might focus on ways of accomplishing this without disrupting the private allocation of resources, Keynesians come off as arguing that private allocation is second and aggregate demand is first — a corollary of this is that consumption over investment is fine, as long as aggregate demand is stable. It shouldn’t be surprising that a large swath of economists attack this in particular.
Mostly, I strongly agree with Daniel and Gene (or Callahan; I’m not sure on blogosphere first-name basis etiquette — I apologize in advance), but I have some reservations. There are a lot of aspects of Keynesianism that make it more focused on consumptions that alternative theories are. As such, it makes sense that many opponents of Keynesianism attack that feature of it.