Nick Rowe’s Critique in Pictures

Nick Rowe has devoted umpteen blog posts to explaining why he thinks some Keynesian economists go horribly wrong by neglecting to stress that their ideas are set in the context of a monetary exchange economy. On the dubious principle that a picture is worth a thousand words and because creating diagrams is where I have comparative advantage over Nick, here’s what he is saying.

If you need me to explain the first picture you’re not interested in economics so stop reading now. It’s here just to set the scene: when all we need is two dimensions then we just draw a triangular budget set and an indifference curve.

But to understand Keynesian economics we need a minimum of three dimensions, so the budget set is bounded by a plane. If that’s the only constraint then the optimum is the point where the plane is tangent to the best attainable indifference surface, which is not shown; imagine it as a shape like a satellite dish facing out from the origin. (I have indicated where I disagree with Nick by marking the vertical axis “Treasure” whereas he would undoubtedly mark it “Money”. But that’s another story. I’ll call it money anyway.)

So far so Walrasian. We go Keynesian and repeal Walras’ Law by introducing a preset money wage (and possibly goods price also) and rationing in the labour market, so that the household is compelled to consume more leisure than it desires:

Finally, Nick Rowe’s move: we let Walras re-enter though the back door by allowing workers to barter with employers, selling their brewing skills for beer:

Households are still rationed, so the end result is not quite Walrasian, but the rationing is confined to the market for assets.

[Edited to fix the perspective in the third picture.]

Chef Aid for Ireland

According to the BBC:

Irish officials have not denied they are in talks about accessing the EFSF but instead say "it makes no sense".

I believe this is what is known in legal circles as the Chewbacca defence.

Scott Sumner: an explanation

Well not really. I can't explain Scott Sumner. But this picture might clarify my comment on his blog.

Krugman for Czar

Probably the best idea Eugene Fama has had in a while.

You and me both, Warren

Warren Buffett admits that he made some "dumb" mistakes during the past year.

In his annual letter to investors in his company Berkshire Hathaway, he said the errors included buying stakes in two Irish banks.

Is there an emoticon for a rueful grin? Having spent most of my working life dealing with bankers, mostly Irish, I never thought the day would come when I could reproach myself for being too trusting of them.

Hell no, we won't go.

With American voters pondering whether Barack Obama is the Antichrist, in which case it might be better to play it safe by putting a 72-year-old with a serious anger-management problem in the White House, the Irish Times brings news that we too have substantial numbers of paranoiacs on the electoral register:

ALARM THAT Irish children could be conscripted into an EU army featured high on the list of reasons why people rejected the Lisbon Treaty, research commissioned by the Government has found.