More about the liquidity trap

As I mentioned a couple of weeks ago now, in the course of "Money Week," one of Keynes' signature ideas is the liquidity trap: business slows to a crawl when everyone becomes a hoarder. No one wants to lend, or keep their money in the care of institutions that lend, and the interest rates cannot get low enough to correct this situation in supply/demand terms.

Do we believe in this idea, dear reader?

The standard free-marketer's response to talk of a liquidity trap is that it is nonsense. It is based on the idea that there can be a sharp increase in demand for money that is NOT an increase in the demand for goods. Everybody becomes a hoarder. But why? Because everybody becomes attached to the medium of exchange, at the expense of the actual exchange? That sounds like a personal pathology, unlikely to be common enough to have macroeconomic effects.

Most people realize that money is a medium of exchange. It is valuable BECAUSE it buys goods and services. It is not valuable as an alternative to goods and services.

So when Keynesians see a depression and say "there must be a liquidity trap here," Austrians see the same depression and say, "there must be some problem here, but Keynesians ideas go no distance to explaining what it is."

At this point we could naturally seg into a discussion of "Say's Law," and the arguments pro and con. But I'll leave you to look up that expression yourselves. That is the founder of said law, Jean-Baptiste Say, portrayed above.

A Story About Coleridge

This is a quote from a memoir by Dorothy Wordsworth, reflecting on a trip she took with two famous poets, her brother, William Wordsworth, and their similarly gifted companion, Samuel Taylor Coleridge. We sat upon a bench, placed for the sake of one of these views, whence we looked down upon the waterfall, and over the open country ... A lady and gentleman, more expeditious tourists than ourselves, came to the spot; they left us at the seat, and we found them again at another station above the Falls. Coleridge, who is always good-natured enough to enter into conversation with anybody whom he meets in his way, began to talk with the gentleman, who observed that it was a majestic waterfall. Coleridge was delighted with the accuracy of the epithet, particularly as he had been settling in his own mind the precise meaning of the words grand, majestic, sublime, etc., and had discussed the subject with William at some length the day before. “Yes, sir,” says Coleridge, “it is a majesti

Searle: The Chinese Room

John Searle has become the object of accusations of improper conduct. These accusations even have some people in the world of academic philosophy saying that instructors in that world should try to avoid teaching Searle's views. That is an odd contention, and has given rise to heated exchanges in certain corners of the blogosphere. At Leiter Reports, I encountered a comment from someone describing himself as "grad student drop out." GSDO said: " This is a side question (and not at all an attempt to answer the question BL posed): How important is John Searle's work? Are people still working on speech act theory or is that just another dead end in the history of 20th century philosophy? My impression is that his reputation is somewhat inflated from all of his speaking engagements and NYRoB reviews. The Chinese room argument is a classic, but is there much more to his work than that?" I took it upon myself to answer that on LR. But here I'll tak

Five Lessons from the Allegory of the Cave

Please correct me if there are others. But it seems to be there are five lessons the reader is meant to draw from the story about the cave. First, Plato is working to devalue what we would call empiricism. He is saying that keeping track of the shadows on the cave wall, trying to make sense of what you see there, will NOT get you to wisdom. Second, Plato is contending that reality comes in levels. The shadows on the wall are illusions. The solid objects being passed around behind my back are more real than their shadows are. BUT … the world outside the the cave is more real than that — and the sun by which that world is illuminated is the top of the hierarchy. So there isn’t a binary choice of real/unreal. There are levels. Third, he equates realness with knowability. I only have opinions about the shadows. Could I turn around, I could have at least the glimmerings of knowledge. Could I get outside the cave, I would really Know. Fourth, the parable assigns a task to philosophers

Jamesian Philosophy Refreshed

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