Krugman never read Hayek

One of the best books ever written by the austrian economist Friedrich von Hayek is, by far, Prices and Production. It was first published in 1931 (the second edition is from 1935) and it’s one of the best presentations of Austrian Business Cycle Theory. A must read to anyone who want to understand the theory. In re reading some parts of it, I have found something interesting.

The keynesian economist Paul Krugman made a famous criticism of the austrian theory in 1998. Last week I was shocked by the fact that Hayek already refuted his criticism in his book. Actually, Krugman was refuted before he was born. 

Krugman's critique in 1998:

Here's the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?

Here is Hayek's response in 1935 (page 271 of the linked book):

But while the nonspecific goods, in particular the services of workmen employed in those earlier stages, have thus been thrown out of use because their amount has proved insufficient and their prices too high for the profitable carrying through of the long processes of production, it is by no means certain that all those which can no longer be used in the old processes can immediately be absorbed in the short processes which are being expanded. Quite the contrary; the shorter processes will have to be started at the very beginning and will only gradually absorb all the available producers’ goods as the product progresses toward consumption and as the necessary intermediate products come forward. So that, while in the longer processes productive operations cease almost as soon as the change in relative prices of specific and nonspecific goods in favor of the latter and the rise of the rate of interest make them unprofitable, the released goods will find new employment only as the new shorter processes are approaching completion.62 Moreover, the final adaptation will be further retarded by initial uncertainty as regards the methods of production which will ultimately prove profitable once the temporary scarcity of consumers’ goods has disappeared. Entrepreneurs, quite rightly, will hesitate to make investments suited to this over-shortened process, i.e., investments which would enable them to produce with relatively little capital and a relatively great quantity of the original means of production.

So that’s why you are not “always” going to have a “corresponding consumption boom”. And that’s also the reason why you would have a rise in unemployment. Notice that Hayek already answered both questions.

Krugman continues:

Most modern hangover theorists probably don't even realize this is a problem for their story. Nor did those supposedly deep Austrian theorists answer the riddle. The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem created as the economy transferred workers from a bloated investment goods sector back to the production of consumer goods. (Hence their opposition to any attempt to increase demand: This would leave "part of the work of depression undone," since mass unemployment was part of the process of "adapting the structure of production.") But in that case, why doesn't the investment boom—which presumably requires a transfer of workers in the opposite direction—also generate mass unemployment? And anyway, this story bears little resemblance to what actually happens in a recession, when every industry—not just the investment sector—normally contracts.

In the previous Hayek's quote there is a footnote number 62. There he said:

62 The reason for this asymmetry between a transition to longer processes of production, which need not bring about any of these peculiar disturbances, and a transition to shorter processes, which will regularly be accompanied by a crisis, will perhaps become more evident if it is considered that in the former case there will necessarily be time to amortize the capital invested in the existing structure before the new process is completed, while in the latter case this will evidently be impossible and therefore a loss of capital and a reduction of income inevitable. (In all these discussions it is assumed that technical knowledge remains the same; a shortening of the structure of production which is due to technical progress has an altogether different significance from that due to an increase of consumption.)

There you have it. Hayek answered Krugman's critique 63 years before. It is irrelevant whether Krugman likes Hayek’s answer or not. The important thing is that, had he read the book, he would never made the questions in the first place. Joseph Salerno is completelly right, Krugman never read the Austrian Business Cycle Theory from its original sources (Hayek, Mises, Rothbard). He just have read the "garden-variety neoclassical theory" from Haberler.

You can add this to all other evidence (here, here, here, here, here, here, here, here and here) which demonstrate that Krugman never understood what he was criticising.

No, The War Was Not Good

"Lord Keynes" (LK) has two posts, and some others, trying to show something good on World War II. I must say however that I found his attempt highly unconvincing. I will try to show it next.





1)  LK says:

"The sheer absurdity of asserting that “no economic good” of any kind came out of the war is refuted by this point alone. Many people no longer had to experience the grinding poverty of unemployment, and obtained work on the home front when the war started. And they obviously chose that work over being unemployed."

His “one-point refutation” is only valid in the case that there was no other alternative to give jobs to unemployed people than war. But that was not true. 

It is very easy to end unemployment trough all kinds of wasteful projects. Hitler’s military command economy also put an end to German unemployment, even a useless mediocre like Stalin could achieve some kind of "full employment". Can anyone deny the "employment effects" of building big concentration camps? No. But everyone can agree that, in a non-intervened price system, there were other alternative uses to employ those resources. So it is totally wrong to say that "at least" concentration camps "create employment". Concentration camps were just one (very unprofitable and unfeasible in market) project, which to be achieved must employ resources, but there were a lot other profitable projects for those resources in a non-hampered market.  We can apply the same thing to war. 

There is a fact that cannot be denied: Employment to produce things to destroy is very different than employment to produce things to consumers. In both ways you can employ people, but the costs of those employments are different in each situation. People's standard of living will vary in both cases. You can have either a) employment and increasing standards of living or b) employment and lowering and bad standards of living. LK finds some "good" thing in b) only by looking at employment. But b) not only is an inefficient way, it is totally unsustainable because you cannot maintain the destroying policy after everything and every incentive to create have been destroyed. However a) has both qualities: a tendency to efficiency and it is sustainable. 

The “benefit” of employment of the former unemployed people was achieved by creating a loss to those killed/injured or to capital goods and then lowering others' standard of living, not to mention that this kind of employment involves a high risk job for those "employed" in battlefield. You are employing resources to destroy other resources (people killed/injured at front are labor resources lost). But lets assume that bullets, tanks, guns, etc. are produced but no one uses them, so no one is killed. Even here we have a zero-sum game. Resources that could have been devoted to satisfy consumers have been wasted on useless armament, so the “profit” of the jobs created was achieved by the loss of standard of living of everyone (included those employed in armament). In short: There are people employed but there is no enough bread. There is no economic good on all this. 

If a big confrontation were a good remedy for unemployment, we could have obtained a similar result just by hiring unemployed Americans to kill other Americans. Can we deny the employment effects of this? Notice how arbitrary are the possibilities when government "hire" people to do whatever we want if we consider employment as an end, instead of a means to achieve ends. Free-market economists know that work is a means to achieve ends, not an end in itself. If creating jobs is the end, then any end that uses workers is valid, so LK will have to face the reality of admitting that building concentration camps were a good way to create employment. A Hitler's admirer can say that people preferred to work on building gas chambers for Jews rather than "starve in unemployment", and LK will have to accept that statement. 

The only possible answer I think LK can use, is that he is defending a particular end: War against Nazism. However this does not solve the problem, because that is just an arbitrary end. In exactly the same way, Hitler could have said that he was fighting against "malign capitalist exploiter imperialism" and "barbaric communist materialism". As well as Bush could justify his war by saying he was "fighting terrorism" and "avoiding" further attacks on American soil. Since communism and terrorism are as bad as fascism, those wars were justified under LK's criterion. This is not of course a defense of Hitler; it is a criticism of LK's method to justify war: his arbitrariness. Despite the fact that Hitler's was a terrible genocidal totalitarian regime and we can certainly make a case to war him, today there are other bad regimes similar to fascism (North Korea can menace the entire world with nuclear weapons).

It was perfectly possible to "combat" unemployment without destroying resources, without lowering everyone's standard of living, without rationing and putting price controls, without killing people, without destroying capital goods, etc. Had not the government intervened the economy, see Higgs (1997), and labor market, see Gallaway and Vedder (1987), US could have reached the employment of people without the destruction event of war. So there was no merit at all on employing people for war if we compare it with the other possible peaceful market solution.

In focusing in the benefits of one group (those former unemployed now employed) LK is not seeing the group that is victimized and resources lost (those American soldiers killed i.e. less labor, those people forced to reduce their standard of living, those who suffered rationing, inefficient price controls, goods that didn't come to exist because resources are being used to fight war, etc.). It is true that, as Higgs said, some few people benefited from price control. That is the basic fact of a shortage created by maximum price! Some few people will get the product at the artificially lowered price, but there will be a great majority of people that will not. You had, say, 300 people that could buy the milk and 100.000 people that couldn’t. Only by omitting all this (“what is not seen”), one can say that there was something "good" in WWII.

To the extent that war means to deliberately lose real (workers on the front, capital goods, investing iron in tanks instead of cars, etc.) and monetary resources, it does not contribute one iota to prosperity. By concentrating just on employment as the thing “positive” of war, LK has overlooked what was destroyed by that employment and the alternative market method to achieve employment. That destruction, makes his only positive point useless.

There was an alternative way to employ people which could have achieved both 1) not letting the people starve by allowing them to work and at the same time 2) it wouldn't had destroyed wellbeing of every one.  

WWII did lower American's standard of living, as Horwitz and McPhillips (2013) demonstrated, not only from the statistic point of view. Average American did not even think that their standard of living was recovering in those years.

Higgs (1992) also knew it: 

“the deterioration of quality and disappearance from the market of many consumer goods, the full effect of the nonprice rationing of many widely consumed items, and the additional transactions costs borne and other sacrifices made by consumers to get the goods that were available. When one corrects the data to provide a more defensible measure of what happened to real consumer well-being during the war, one finds that it declined… one must recognize that consumers had to contend with other extraordinary welfare-diminishing changes during the war. To get the available goods, millions of people had to move, many of them long distances, to centers of war production… After bearing substantial costs of relocation, the migrants often found themselves crowded into poorer housing. Because of the disincentives created by rent controls, the housing got worse each ear, as landlords reduced or eliminated maintenance and repairs. Transportation, even commuting to work, became difficult for many workers.”

In another place he wrote: 

"Unemployment fell during the war entirely because of the buildup of the armed forces. In 1940, some 4.62 million persons were actually unemployed (the official count of 7.45 million included 2.83 million employed on various government work projects). During the war, the government, by conscription for the most part, drew some 16 million persons into the armed forces at some time; the active-duty force in mid-1945 numbered in excess of 12 million. Voila, civilian unemployment nearly disappeared. But herding the equivalent of 22 percent of the prewar labor force into the armed forces (to eliminate 9.5 percent unemployment) scarcely produced what we are properly entitled to call prosperity."

Higgs  (2004):

"If we take into account only those parts of the wartime capital formation that had value beyond their sheer immediate usefulness in winning the war, and if we give appropriate weight to the significant measurement errors that I have described, then we may conclude with reasonable confidence that, in fact, real capital formation during the first half of the 1940s was not proportionally greater than that during the latter half of the decade; indeed, it was more likely a good deal less. The wartime socialization of investment served a definite purpose in allowing the U.S. military-industrial complex to triumph over the nation’s enemies in World War II. Beyond that, its achievements had little if anything to recommend them."

And also Skousen (1988): 

“Certainly, millions of idle workers were put back to work, but hundreds of thousands died or were wounded on the battlefield. Employment during the war was not particularly easy. The average work week rose 20 percent in manufacturing, construction, and mining, and many key employees, especially engineers, had to work weary 14-hour days, 7 days a week. Taxes increase dramatically and permanently. The standard of living declined during this time, despite higher incomes, as Americans gave up many of the pleasures of life.” 

Even the "orthodox" story demonstrates how restricted and bad the situation of people was. After war they spent their savings on goods that they couldn't get before due to command economy, thus creating a "consumption boom". Higgs (1999a) defies this story, people reduced their real saving rate but they did not dissave. 

It is true that LK recognizes that the people situation’s at war jobs was not good, but his justification is that a bad job is better than no job, ignoring the alternative way to employ people and other costs. 

Real consumption, real private investment (at 55% of its 1941 level) and private output (it was below 1933!) sunk in war years, Murphy (2012). That was certainly not an improvement on standard of living. And remember that millions of people died in war. Putting aside any moral and ethical consideration, that meant a real resource lost because there were less young, productive and healthy workers.

Even Krugman knew that people were living badly: 

"Consumer goods were rationed; people were urged to restrain their spending to make resources available for the war effort."

Yet another cost of war was the massive increase in power of government and decrease civil liberties. Again here is Higgs (1999b)

“World War II witnessed massive violations of human rights in the United States, apart from the involuntary servitude of the military conscripts. Most egregiously, about 112,000 blameless persons of Japanese ancestry, most of them U.S. citizens, were uprooted from their homes and confined in concentration camps without due process of law.” In his obsesion with employment Lk overlooked all this costs. Which is very strange for someone who aparently is social democrat, because these costs are always taken in full account by all members of that left oriented ideology. This are economic issues to the extent that are interventionist meassures."

Not even LK's “advance in technology” favorable argument is true. Actually Mises had answered (Lecture 6 and Human Action) a very similar argument, however it was not about war but about credit expansion.  

If some technological innovation is unprofitable right now, it is because people have more urgent needs right now! At the moment of war people needed other goods or services rather than using resources to develop computer or rocket technology. So that acceleration in technology advance cost satisfactions that were more valued by people. It is not true that that was a improvement. If people were not willing to pay for that technology (either because it was too expense or because it was not discovered a profitable peaceful use yet) on that moment that means that develop that technology on that moment was a wasteful of resources. Let’s see an example to see how bad can be to force acceleration of events. 

You can force your son to work hard and save since he is 10 years old in order for him to purchase his own house in some years. I am sure that he would highly prefer to play and make friends like other kids, but you have “command and control” over him. After some years, maybe at the age of 25, the boy would have paid the full value of a house and LK could say “look! Thanks to command and control of his life, the boy had earned a home at his 25. That is a clear advance over other kids of his same age”. However, in forcing him to work since he was a kid, you have made him waste his childhood in working, and surely he would have preferred to have good friends and play a lot more rather than work. You cannot say that it was a "clear advance" to force him to work since his 10 until his 25 so he has full property of a house. As in Mises' railroad example, the boy could have owned the house 20 years later (at his 45) without squandered his childhood, but because of command and control of his father he had the “crisis” and trauma of not having had a good childhood. Even if the kid had his own house, we cannot say his father improved his life through forcing him to get his home sooner. In the same way we cannot say that "forced" acceleration in technology advance in WWII has necessarily “improved” American's life, because we would be forgetting all the things consumers could not afford in order to develop by force the technology on war years.

War costs manpower, the lose of capital goods and other real resources, reduction in standard of living, freedoms of people and is a very risky adventure. Computers, radar, nuclear power, rockets and internet would have existed with or without war. The only possible “merit” of war, was accelerating by force its appearance. However the costs of that acceleration were far greater than benefits of having them at an earlier date. What is seen is the computer, rockets, jet, etc. that maybe would not have been developed so soon, LK completly fails to notice what is not seen. So LK cannot affirm that that was an “improvement”. This is not a moralistic critique; costs by far surpassed benefits from people’s and economic point of view. Maybe from political and military point of view war was a "success", but not from society's. Notice that I’m not saying that LK advocates war, what I am saying is that the things that he considers “good” about it, had a lot of higher unseen costs, so they cannot be seen as a net good result. 

And about his assertion that there were a lot of malinvestments after war, yes there were. However "Lord Keynes" must know that, from Austrian point of view, produced capital goods have different degree of convertibility. Some capital goods can be saved from government’s made disaster by entrepreneurs. One example is Aristotle Onassis. When war ended and there were a lot of useless Liberty ships, he had the entrepreneurial ability to anticipate a future increase in naval commerce and bought some of those ships. Because of that, he made great part of his fortune. And again it must be remembered that when we talk about past malinvestments, savings also helped! Far from “refute” Austrian theory, this only reinforce the Austrian story. 

In short. All Austrians know very well that any amount unemployment can be easily removed by government just by building a lot of pyramids. What they also know is that 1) It is unnecessary, because employment could have also been achieved by non-intervened wages (this does not mean "lowering ALL wages" like some ignorants think) 2) Totally inefficient, as the lowering in standard of living of Americans in WWII demonstrated 3) Unsustainable. 

One last thing about unemployment numbers of the Great Depression. Darby's method was completely refuted by Kesselman and Savin (1978) and severely criticized by Gordon (1976). So there is no discussion on unemployment figures here because Darby completely failed.

2) LK continues:

"Secondly, the war allowed the accumulation of savings and money income. The point overlooked by Higgs is that this also allowed both business and consumers to finally complete the process of deleveraging and paying down private debt to a low level. That is a fundamental point: the debt deflationary drag on the US economy was eliminated during the war, as we can see in this graph (in the “private debt” line)."

Austrians before that paper of Higgs knew very well the role of that particular kind of “forced saving” during war. Actually that was in full conformance with Austrian theory, as Skousen (1988) said:

"[I] suggest that the World War II economic boom was in large part the result of a third major factor, often ignored by most economists. This factor is the unprecedented rise in personal and business saving rates during 1941-45. The spectacular rise in private savings provided the billions of dollars necessary to support the war,… Although several variables (including government spending, monetary inflation, and tax rates) changed during World War II, it is remarkable how economic trends followed this Austrian scenario… According to Austrian theory, increased savings and lower interest rates will, other things being equal, precipitate an expansion of raw commodities and capital-intensive industries."

What Austrians also knew, was that 1946 was not thanks to Keynesianism, Vedder and Gallaway (1991): 

“In short, rather than "pent-up demand" preventing a depression, the evidence is more consistent with a distinctly non-Keynesian interpretation: A downward adjustment in labor supply and real wages, accompanied by a more responsible (non-deficit) fiscal policy, served to stimulate investment and consumption spending. Relative price adjustments brought about what Keyensians perceived to be an increase in aggregate demand, rather than the other way around… The evidence shows that aggregate demand rose too little and too late to explain the low unemployment that prevailed in the first two years after V-J day, the period in which demobilization was completed. What did happen was that labor markets, partially con- strained by non-price factors in the wartime period, were allowed to function in a manner that prevented a serious decline. Labor supply abruptly fell, but in addition real wages, adjusted for productivity change, also fell, preventing a massive rise in unemployment. ”

I think that it's unnecessary to say that Austrians also know very well that deleveraging is good for economy.

 3)  LK then says:

"Thirdly, the war fundamentally shifted business expectations from being highly pessimistic to a strong optimism that emerged after the conflict ended."

As explained before, ("forced") savings played a big role. But if LK thinks that “optimistic” expectations helped to revive private investment, then he must accept Higgs’ regime uncertainty explanation on how businessmen's expectations were crushed by Roosevelt's interventionism. 

Finally let’s be fair. I have seen LK in comment sections of a lot of blogs and I am reading some of his own posts. LK accuses others on “citing ad nauseam” Higgs, and maybe he is right. However by using his own criterion for example I can accuse him of citing ad nauseam Sraffa on every single discussion about ABCT in every place. 

Conclusion    

It is true that WWII lowered enormously unemployment and created a boom, nobody has ever denied that. However it is not true that this was a “good” thing about war, if we take in account that there was an alternative better method to employ people. And that alternative method was by far more efficient and sustainable than war.  Besides there were a lot of costs that are not taken into account when we talk about the "benefits" of war.

There was nothing we can call "good" about WWII. The only good war was this one...



 
Bibliography

Gallaway, Lowell and Vedder, Richard K. (1987) "Wages, Prices, and Employment: Von Mises and the Progressives". Journal: The Review of Austrian Economics, Vol. 1, No. 1.

Gallaway, Lowell and Vedder, Richard K. (1991) “The Great Depression of 1946”. Journal: The Review of Austrian Economics, Vol. 5, No. 2.

Gordon, Robert J. (1976) "Recent developments in the theory of inflation and unemployment". Journal: Journal of Monetary Economics, Vol. 2, No. 2. Northwestern University, Evanston, IL , U.S.A.

Higgs, Robert. (1992) "Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s". Journal: The Journal of Economic History.

Higgs, Robert. (1997) "Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War". Journal: The Independent Review, Vol. 1, No. 4.

Higgs, Robert. (1999a) "From Central Planning to the Market: The American Transition, 1945-1947". Journal: The Journal of Economic History, Vol. 59, No. 3. Cambridge University Press.  

Higgs, Robert. (1999b) "How War Amplified Federal Power in the Twentieth Century". The Freeman.

Higgs, Robert. (2004) “Wartime Socialization of Investment: A Reassessment of U.S. Capital Formation in the 1940s”. Journal: The Journal of Economic History, Vol. 64, No. 02.

Horwitz, Steven and McPhillips, Michael J. (2013) “The Reality of the Wartime Economy: More Historical Evidence on Whether World War II Ended the Great Depression”. Journal: The Independent Review, Vol. 17, No. 3.

Kesselman, Jonathan R. and Savin, Eugene N. (1978) "Three-and-a-Half Million Workers Never Were Lost." Journal: Economic Inquiry 16. Oxford University Press, UK. 

Murphy, Robert P. (2012) "The Myth of Wartime Prosperity". The American Conservative.

Skousen, Mark. (1988) “Saving the Depression: A New Look at World War II”. Journal: The Review of Austrian Economics, Vol. 2, No. 1.

Lord Keynes refutes “Lord Keynes”

In discussing neoclassical law of demand, “Lord Keynes” reaches some conclusions to try to attack the notion that enforced minimum wage can cause unemployment in exactly the same way that setting a price above what market participants would have established would cause a surplus. Let's see what he said:

"It is clear that the “law” is expressed in terms that are highly artificial and abstract. The phrase ceteris paribus is Latin for “[all] other things being equal.” The factors that must be held constant are vast: incomes, prices of other goods, fashions, expectations, information, preferences/tastes, population, the weather, etc.

So when somebody asserts that the law of demand is universally true, what this means is that, in an imaginary, utterly abstract and artificial world in which “all other things were equal,” demand for a product would always rise as its price falls, and demand would always fall as the price rises.

Yet these types of arguments are absurd beyond words, because

(1) the real world never fulfils the ceteris paribus assumption and hence the law of demand, properly formulated, is irrelevant, and
(2) economies are immensely complex and the level of employment is dependent on many factors well beyond the simple dynamics of supply and demand curves. The demand for labour is dependent, above all, on aggregate demand for products, and this, along with many other factors, would compensate for and overwhelm any reduction in demand from higher wages, even assuming the abstract formulation of the law is true.

It does not follow that minimum wage laws can only ever necessarily increase unemployment at all."

One comment about (1): As far as I know, no one has ever said that “ceteris paribus” is a condition that could exist in real world. Nobody, not even neoclassicals, is so idiot to think that we can freeze subjective valuations, technologies, incomes, prices, expectations, etc. of the 1300 million people of China to see how price of oil behaves.

Notice that “Lord Keynes” has said that the law of demand is irrelevant in real world, only to talk about his own "law" (point (2))!!! But is his “law” based on real world non-ceteris paribus assumptions? The answer is no, according to the real Lord Keynes:

“[I]t may be useful to make clear which elements in the economic system we usually take as GIVEN, which are the independent variables of our system and which are the dependent variables… We take as GIVEN the existing skill and quantity of available labour, the existing quality and quantity of available equipment, the existing technique, the degree of competition, the tastes and habits of the consumer, the disutility of different intensifies of labour and of the activities of supervision and organisation, as well as the social structure including the forces, other than our variables set forth below, which determine the distribution of the national income. This does not mean that we assume these factors to be constant; but merely that, in this place and context, we are not considering or taking into account the effects and consequences of changes in them.”

“[T]he GIVEN factors allow us to infer what level of national income measured in terms of the wage-unit will correspond to any given level of employment; so that, within the economic framework which we take as given, the national income depends on the volume of employment, i.e. on the quantity of effort currently devoted to production, in the sense that there is a unique correlation between the two. Furthermore, they allow us to infer the shape of the aggregate supply functions, which embody the physical conditions of supply, for different types of products; — that is to say, the quantity of employment which will be devoted to production corresponding to any given level of effective demand measured in terms of wage-units." (italics, bold and capital letters added)

That’s right. Keynes has inferred a kind of “law” by holding everything else constant: “the national income depends on the volume of employment”. Amazingly this ceteris paribus “law” is what "Lord Keynes" invoked as his point (2). But that relation is also subject to the condition that ALL other “factors” are “GIVEN”. We can restate LK assertion by saying that “in an imaginary, utterly abstract and artificial world in which all other things were equal, the level of national income will correspond to any given level of employment (his point (2)). And yet these types of arguments are absurd beyond words, because (1) and (2)”. Even Keynes knew very well that the ceteris paribus couldn’t be fulfilled in real world, but that was not a problem for him to assume all other things as “given” in “the place and context” of what he was analyzing.

His own position puts “Lord Keynes” closest to Hazlitt than to Keynes himself. So I don’t think "Lord Keynes" can sleep tonight… Hazlitt said:

“Keynes thinks "it may be useful to make clear which elements in the economic system we usually take as given, which are the independent variables of our system and which are the dependent variables"… Now economics is concerned with human valuations, human decisions, and human action. Everything in the system is a variable. No relationship (unless it is merely two ways of saying the same thing) is a constant. Nothing is permanently "given." Almost anything can be an "independent" variable, in the sense that a change can originate at that point. When a change has originated at any point, then the relationship of nearly all the factors is one of mutual dependence, of interdependence.”

See also some good remarks about "abstractions" and all that from Jonathan Catalán. Also it’s good to see this Daniel Kuehn’s post. Kuehn is a Keynesian, an “open minded” Keynesian, so even when I don’t agree with the whole post (I think that ABCT explains present US and world crisis fantastically well) he made some very good points.