Monday, 31 December 2012

The Real Freedom Illusion

Critics of classical economics often contend that the freedom classical liberals prize is not 'real freedom'. To illustrate,
  • someone who is 'free', but is (say) immobilised by a terror of breaking the taboos that saturate their daily life, is not really free (Gurley)
  • someone clinging to a log in a torrent may nominally be free in negotiating with a passer-by to throw a rope, but they are not really free. (Hobson deploys this sort of example).  
Such critics commonly favour a conception of freedom different from the classical 'absence of human constraint'  formulation; an alternative conception that goes under the head  of 'positive freedom', and amounts to an index a person's capability.

Votaries of freedom may be tempted to follow this path of isolating 'real' freedom . After all, a freedom that allows one to drown is not a very attractive freedom.

But I contend that those who prize freedom should be disaffected by such a search  for 'real', 'positive' freedom. I contend that this theorising of real freedom will not conclude in distinguishing true freedom from its shams -  an achievement that any votary of freedom would esteem- but will instead reduce to identifying the conditions in which freedom is desirable; indeed, irresistible. Such a program of investigation is, undeniably, of interest . But my objection is that it will blunt the appreciation of the devotee of freedom of their object of admiration. Instead of exploring her loveliness, we list her faults.

True love is blind. The most passionate votary of freedom does not see the value of freedom in any way 'conditional'. They will not  hold freedom to account on any criterion. The votary of freedom does not, for example, require that freedom brings happiness. He does not care if freedom offends 'equality of opportunity'; he is unconcerned if it accompanies exploitation. The votary of freedom believes one should be free to be unhappy; free to infringe equality of opportunity; and free to exploit (if 'exploit' means paying less for something than it is worth), .

Does the votary of freedom, then, also believe in the freedom to cheat? Not logically. If I am being paid in counterfeit notes we may be confident that I have not chosen to be paid in counterfeit notes.The fraud  is subverting my freedom. The 'freedom to enslave' is a similarly incoherent notion. But what of the freedom to harm others? It is on this question that classical liberalism struggled. The Millian dictum that that freedom should be restricted so that its exercise does not harm others is massively illiberal in implication, at least in the absence of a massive limitation of the harm which 'counts'. (If you criticise this post you might be deemed to harm me). Mill left classical liberalism without an adequate account of freedom, and leaving the door open to doctrines positive freedom of New Liberalism.

Hayek's attempt to get a more adequate account of freedom, without resorting to capability, surely indicates the impulse of the votary of freedom. His formulation of  freedom as 'the absence of coercion' is an improvement on Mill's inadequate effort, but would rule still out the 'manipulation'  that freedom surely permits. Friedman's emphasis on 'choice' as the nub of freedom is better, and Buchanan's stress on choosing our constraints better still. Perhaps freedom is 'choice over the human wills we are subject to'.

But where would a formulation of freedom  as 'choice over human wills' leave that person clinging to a log?  Free or unfree?Very possibly it leaves them 'free';  for it is possible there are several passers by, all with a rope. The person is dependent on no single human will; and so he is free. And yet, if he is destitute he will drown.  His freedom, then, does necessarily save him from drowning. But the moral of the scenario is not that his freedom is not real; but that it isn't useful. And this is just to say that freedom is not a panacea.

The most passionate devotee will object. And they will be wrong in their objection. The discreet and sincere admirer of freedom will acknowledge its limitations. To admire is not to worship. And to acknowledge the limitations will serve the appreciation of freedom, as appreciation rests on truth. The only other way to respect truth  without admitting blemishes of the beloved, is to participate in the program of 'real freedom'- seek to identify the settings of freedom's perfection. And that is massively reducing  of her domain.

And that is why the adversaries of freedom favour 'real freedom'

Tuesday, 20 November 2012

The Scholar as Truth Teller


Ian Castles (1935-2010) is best known as the first Secretary of  a new-born Department  of Finance (1979-1986) and the eleventh Australian Statistician (1986-1994).

I wish to shine a light here on a scholarly production of Ian Castles: his paper of 1984 entitled ‘Economics and anti-Economics’. This paper is equally remarkable and neglected. It is neglected: it is almost impossible to obtain. And it is remarkable that a public servant senior engrossed in administration could, amid the cares of such an office, produce what is essentially a Masters thesis born of the scrutiny of miscellaneous recondite texts.

The subject of Castles’ paper is the so-called ‘the moral critics of political economy’ of the 19th c. His thesis is that that they were, in truth, immoral critics of political economy. Even ‘immoral’ is understatement; in reading Castles paper I am left with the thought that ‘appalling, atrocious, indecent to the point of villainy’ would be closer to the mark.

Castle’s case is a careful 30,000 word long examination of the actual; what was actually said by the economists (as distinct from what they were said to have said); and what was actually believed by anti-economists. In detailing the gulf between these two actuals, Castles’ paper amounts to a crushing piece of table-turning upon these supposed ‘moral critics’.

Castles paper is a tour de force. But in the source of that force we may also locate its lacking; its ad hominem aspect. When I say ad hominem I hardly need say that Castles does not proceed by denigrating the personal attributes of his targets; he did not describe any of them as an ‘ill-bred, half witted Scotchman with a damned soul’; that is John Ruskin’s own well-bred caption for Adam Smith. When I say ad hominem I mean that Castles’ strategy is to show is that the positive assertions of anti-economists were ignorant and ludicrous, and their normative positions were obnoxious.  There is a power in this, procedure  and a frailty: for it is clear that to show that someone has misrepresented (besmirched, calumnied) a corps of doctrine is not to show the doctrine is true, or even an advance towards truth. And to demonstrate that the persons who have censured some tendency are far more censurable themselves, is not to demonstrate the tendency itself is beyond any censure. Thus while Castles paper establishes that the ‘moral critics’ offended justice, it leaves unidentified, unexamined and unresolved the questions at issue that were the background of that act of injustice. And his method of ‘personal critique’ leaves open a method of ‘personal defence’; where the anti-economist shrugs ‘we all know that Ruskin was barking mad; but still… ’.  I wonder if these deficiencies in its dialectic strategy may explain the aspect of proximity-without-contact that I have in contemplating Castles’ paper: for I am conscious that Ian’s apparently vanquishing riposte to anti-economics appeared on the eve of an eruption of anti-economics in  Australia of which in its ignorance, frenzy and indecency would almost match that of the 19th c originals. We must infer the paper did not prevent that eruption; we may suspect it did little to temper its frenzy. During that ghastly episode Castles paper would have given heart to a few economists who knew of the paper; but by its nature it could not supply the logical tools that might provide of logical antidote to the distemper.

One can’t do everything in a single paper!
Let me try to distill what it does do. 

At the outset Castles groups of his protagonists.

On one side Castles places the ‘Economists’; by which he means the Classical Economists.

On the other side are ‘anti-economists’, sometimes known to historians of ideas as the ‘sages’ of 19thc Britain; though perhaps better described as the rhapsodists, the Savonarolas, the berserks of that society: S.T Coleridge, Thomas Carlyle and John Ruskin, who, over two generations, personified a blazing seam of social and political reaction in British intellectual life; and exhaled cyanide gas against the ‘dismal science’, as Carlyle so enduringly branded it.

But, critically, Castles adds to ‘the anti-economists’ a second trio of persons; very different in character and station from the first; but who under mantle of progressivism broadcast in the 20th c the same travesty of economics promulgated by reactionaries of the 19th. These are three ‘teledons’ or celebrity intellectuals of the 1960s and 1970s; CP Snow, JK Galbraith, and Kenneth Clarke; the authors of,

The Two Cultures and the Scientific Revolution
The Age of Uncertainty
Civilisation: A Personal View


The case against classical economics which these three disseminate was essentially the same, and amounted to insinuating a responsibility of classical economics for the banes of 19th c ‘industrialism’: those Dark Satanic Mills; that ‘the condition of the working class’, poverty amidst plenty, the Poor House vs Ascott House. The classical economists, at the very least, bestowed a self-satisfied benediction on this awfulness. They were therefore culpable of moral delinquency; or ‘inhuman[ity]’ in the words of Kenneth Clark,  who Castles rightly identifies as the  leading 20th c disciple of Ruskin’s ‘devastating’ (in Clarke;s word[1]) anti-economics.

Ian Castles contends that the truth about the economists and the anti-economists is much closer the very opposite; that classical economists possessed a feeling of humanity, and a sympathy for humanity; and it was the anti-economists gripped by a loathing of much of their fellow species .

Castles sustains that claim by contrasting the positions of the two groups on various heads of social and economic policy of the day. Let me go through them.


Castles points our that ‘probably the first serious proposal ever’ for universal [publicly funded] education’ Adam Smith, in the Wealth of Nations. [2] In his lead on education Smith was followed by virtually every political economist. Coleridge was roughly contemptuous of such programs of universal education. Ruskin maintained it was best if not all children were required to learn to read.


Castles bears evidence of a leniency of the classical economists to perpetually troubled Ireland. Ricardo recommended that to Ireland be applied a ‘system, of kindness, indulgence and conciliation’. And Nassau Senior, no soft touch in these matters, contended that ‘the erection, regulation and support of fever hospitals, infirmaries and dispensaries [in Ireland] should be fully and immediately attended to’(Senior 1831).[3] It was the anti-economists  who, as Castles documents, felt an irritated, resentful impatience at such solicitation for Ireland’s wants, and repeatedly insisted that the Lord would provide whatever necessaries Ireland might require.[4]

The New Poor Law

The New Poor Law would seem to be a prize case for anti-economists. But however severe the New Poor Law, it needs to be registered that it was the express position of those Political Economists who favoured the Law (such as Mill) was that the Law was warranted by the obligation of society to relieve the destitution of the destitute. However qualified that obligation was in the minds of Mill and the like, they held the destitute had a rightful and lawful claim on society, and the New Poor Law was to meet that claim.       
Political Economists could also be friends of private charity, and the greatest of them was the greatest friend; Ricardo. On his estate Ricardo established a dispensary, an alms house, and a school; he was a prolific subscriber to various charities: the Poor of the Parish of Hanovers Square, Extreme Distress at Spitalsfield and Persons Confined for Small Debts …. (the list is extensive). 

It was Carlyle who considered all this provision for the poor (be it public or private) an absurdity.

Why not regiment these unfortunate wretches, put colonels and corporals over them and thrash them, if it proved needful, into habits of industry …Try them for a couple of years and if they could not feed themselves … they ought to be put out into the world’ …. Sell them in Brazil as niggers.


Smith, Ricardo, Mill, Senior, were strenuous anti-slavers; the anti—economists were almost always  slavers.

Coleridge snarled that the Empire was being subverted by abolitionism. In Unto This Last  –  the anti-economics frenzy so by praised Clarke - Ruskin announced that slavery is ‘an inherent, natural and eternal inheritance of much of the human race.  It was Carlyle’s fury at abolitionism was the very occasion of his coinage the ‘Dismal Science’; in  his paper the ‘Nigger Question’ of 1849, in which, amidst fantasies of firing squads for political economists, he champions slavery as ‘the answer’ to that ‘question’.

There is an historical epilogue here: ‘the Eyre Controversy’. In October 1865 a rioting mob in Jamaica killed 18 people. At the behest of the Governor, Edward James Eyre, British troops executed, or lawlessly killed, 586 blacks, and flogged another 600. Scandalised, JS Mill formed a Jamaica Committee. But Carlyle ‘heartily sorry for Eyre’, and with Ruskin formed a Eyre Defence Committee to rebut the ‘nigger philanthropists’ of Mill and Henry Fawcett.

Let me pause to insert a speculation. I put to you that all three of these ‘moral critics’ of political economy adopted - presumably as a model for British public - the persona of tyrant. In the conduct of Eyre we have sinister possibility of Life imitating Art. Thus there is a more than personal significance in the character – the bad character – of the anti-economists; and there is a broader significance in the good character of Ricardo and Malthus. The evidence on that score, that Ian Castles’ careful plots, is that this most vilified of men they were equable, amicable, affectionate. 

There is also an added significance in the intellectual honesty of the classical economists, about which Ian also assembles a fund of personal testimony. For the insinuation of JK Galbraith in the Age of Uncertainty is that the classical economists were not so; his implicit message is the only significance in their thought lies in whatever propaganda purpose it might be put. It may seem strange for a supposed historian of economic doctrine to impute such logical insignificance to the theories of classical economics ; but the imputation is doubtless rooted in the position (so congenial to the adversaries of classical economics) that reality is plastic; that it can be pushed into any desired shape; that we have play-doh economy is free of constraints, trade-offs, costs,  … The upshot is that there is no hidden mechanism to trouble over, there is no economic law to be uncovered; only political power to be obtained

Very different was the outlook of the political economists, who believed that a powerful but  complex mechanism underlay economic events;  a mechanism that was hidden to careless observer but yet could be found. It was on account this outlook that, as Maria Edgeworth records, ‘[Ricardo and Malthus] hunted in search of truth and huzzaed wherever they found her ... .’

I  suspect it was partly that jubilant sense of discovery; that na├»ve joy; that impelled Ricardo to unabashedly advance his doctrines in the form of motions to the House of Commons, that were lost by vast majorities; provoking even one of his parliamentary allies to rise  from the bench and declare that the Member for Portarlington must have ‘descended  from Jupiter’.

How unworldly the ‘worldly philosophers’ seem in contrast to Clark, Galbraith and Snow,  those three sleek greyhounds of various mid-20th ‘corridors of power’. The ambassador’s residence, the division lobby of the House of Lords, the weekend party at Windsor castle; such were their natural habitats.

And it is on account of their unworldliness that the classical economists were very differently motivated to write than Galbraith etc. On this difference Castles tellingly quotes Galbraith from his Affluent Society;

Audiences of all kinds applaud what they like best … the great television and radio commentators make a profession of  …  saying with elegance and unction what their audience find most acceptable. 


The conflict between the wish to be something in the world and the wish for other things brings me Castles treatment CP Snow.

What provokes Castle’s ire in Snow’s Two Cultures is Snow’s light minded pairing – in a single phrase - of Napoleon wiith Adam Smith. To give some quarter to Snow for his apparent fatuity, I wonder if, as a self-identified ‘democratic socialism’ Snow was seeking some epitomisation of ‘autocratic capitalism’ and failing to find one, settled for epitomisation of autocracy (Napoleon) and epitomisation capitalism (Smith). But, however that may be, Castles does not hesitate to pounce, and stresses the perfect antipathy between the world views of the Emperor and the professor; the one a philosophy of conquest, and the other a philosophy of exchange; an antithesis exemplified in their stance to empire: the one  the supreme imperialist; the other an emphatic  anti-imperialist, who saw empire as corrupt and costly methods of Mercantilism; and who would have found every corroboration for this thesis the ‘Continental System’ introduced by Napoleon. This last policy provoked some forward opposition by some economists in France, which Napoleon dismissed as ‘the twaddle of economists’. As T. B McCauley said, Napoleon ‘hated political economy’
In its revolutionary despotism we can doubtless detect in the Napoleonic empire a prefiguring of the totalitarian state. But we can also see a prefiguring of the totalitarian state in Napoleon’s sensitivity to (and anxiety about) social ideas, including economic ideas. Napoleon once complained if there were a monarchy made of granite, the abstractions of the economists would be enough to grind it into dust.  Napoleon was resolved to subvert any such subversion by abstract thought: thus J-B Say, having refused the importunate overtures of the Emperor, was dismissed from the Legislature, and publication of his Treatise of Political Economy forbidden;  thus Napoleon abolished the Institut concerned with social sciences, amidst much fuming about ‘ideologists’ (while preserving the Institut of natural sciences and humanities).

Warp it, break it; make it teach that black is white. This is how totalitarian societies deal with social thought.  War is Peace, Freedom is Slavery, Ignorance is Strength.

In ‘Economics and Anti-economics’, written in 1984, Castles makes effective rhetorical reference of Orwelllian oxymorons to underline the perverse rewriting of history of economics by Clark and Galbraith. ‘Inhumanity is Humanity’ is the double-speak slogan under which they stand. And yet Castles’ references to Orwell’s 1984 in some respects miss the mark. For we don’t live in a totalitarian state; and the perversely false mythologies of Clark and Galbraith flourish without the terroristic negative incentives of such a state. A free society evidently contains positive incentives that powerfully nourish such mythologies. Pondering what those positive incentives are brings me back to the unwitting (or shameless) admission of Galbraith that Castles highlighted:

Commentators make a profession of saying with elegance and unction what their audience find most acceptable 

The looming reference is the corruption to thought that lies in the temptations to popularity and celebrity. To put the thought another way, unpopularity and obscurity can be a price of integrity. An indifference to those prices can be a source of integrity 

We are fortunate that considerations of popularity and celebrity did not figure in Ian Castles motivations to write ‘Economics and Anti-economics’. It is a powerful piece of history of economic ideas. Yet it was never his lot to have it published by Andre Deutsch (it was never published at all). It was not his lot to deliver his economics by Reith Lecture; he did not have a BBC microphone or camera. Instead he delivered his paper to a session in Canberra of the (soon to expire) ANZAAS Conference; no place at all for any ‘great radio and television commentator’.

Ian Castles had the worldly unworldliness of Ricardo, and regardless of the presence or absence of the television camera, he ‘hunted in search of truth and huzzaed wherever he found her’.


Castles, Ian (1984) ‘Economics and Anti-Economics’, 54th ANZAAS Congress, 18 May 1984

Clark, Kenneth (1950) The Gothic Revival : an Essay in the History of Taste , London, Constable

Coleman, William (2004) Economics and Its Enemies: Two Centuries of Anti-Economics , Palgrave Macmillan

Senior, Nassau (1831) Letter to Lord Howick on a Legal Provision for the Irish Poor.

[1] See Clark (1950)
[2]   Barthelemi-Gabriel Rolland is recorded by historians of education to be the author, in 1768, of the very first such proposal (see Coleman 2004, p257).
[3] James McCulloch believed that in Ireland ‘the poor should have a claim, a right to support’. Senior opposed such a claim (Senior 1831, 30).
[4]What are the great causes of Irish misery?’ asked John Wilson (anti-economist and friend of ST Coleridge) … Without hesitation we reply … he is the author of his own misery … in the qualities of disposition for national prosperity, he stands at the lowest of civilised men’ (see Castles 1984, p34).

Saturday, 11 August 2012

The Australian Research Council Awards $0 to Economic Research

The Australian Research Council has just announced the successful applicants for its current round of Future Fellowships. And the message to economists is: ‘Don’t even think about it’.
Introduced subsequent to a 2007 election campaign  promise,  the ‘Future Fellowships’ program provides four-year fellowships to  a total of ‘1,000 outstanding Australian and international [academic] researchers in the middle of their career’. The Fellowships are not ungenerous: the salary component (including on-costs) may run up  to $182, 792 per annum; and each Fellow is entitled to up to $50,000 per annum ‘for infrastructure, equipment, travel and relocation costs directly related to the Future Fellow’s research’. You need not be an Australian citizen or permanent resident, although about 90 percent are.
in 2012 209 Fellowships were awarded, at a total cost of $A151m.
How many did economics receive? 
This fact is easily ascertainable from the relevant ARC web site ( where all the successful applicants for Fellowships are classified by a Field of Research code.  And there are none are in Economics (where Economics is defined to include econometrics).
Neither was the 2012 outcome an outlier. In 2011 only 2 Fellows out of 203 came from Economics. In 2010 only one did.
The ARC's ‘Selection Report’ has had little to say in recent years about the variations in the success ratio by Field of Research. But its 2010 ‘Report’ has a  table that records four Economics applicants had been successful, or 9 percent of  all Economics applicants. This compared to 21 percent of applicants overall. But even this 9 percent is a massive overestimate. It is a matter of the ARC’s own elaborate public record that (as I noted above) only one applicant  in 2010 had  an Economics field of research. So how does it come up with ‘4’ in that table? A footnote seems to suggest the explanation: an application may be 'multidisciplinary'. The upshot  appears to be that any application with  the word 'economic' in its proposal is 'economics’ in the minds of the ARC. Here is the Project Summary of one such application – with a field of research code from Political Science - what WAS successful in 2010.
For twenty years, even as the world economy has been repeatedly disrupted by crises, efforts at reform have been blocked by economic ideas regarding the virtues of free markets. If these views remain in place, there will be more crises. This research seeks to understand how elite consensus limits debate and how new ideas might enable reform.
Now that is the sort of ‘economics’ that the ARC wants to see!  And will pay $563,000 for it. 
And, oh yes, up to $50,000 for travel.

Tuesday, 7 August 2012

Hunting the Trap

The supposed imperative to deploy Keynesian policies to deal with current unemployment  rests on the proposition that the market economy is not ‘self-correcting’; market actors do not (or ‘cannot’) change prices in the face of market disequilibrium so as to eliminate the disequilibrium.
What case can be given for this contention?
Keynes struggled over 403 pages in his General Theory to provide a cogent one.
The consensus of commentators is that best case that can be made from Keynes’ ideas for the lack of ‘self- correction’ lies in a phenomenon known as the ‘Liquidity Trap’. Keynes himself only refers passingly to the phenomenon. Indeed, the phrase ‘liquidity trap’ never appears in the General Theory. (It first appears only in 1940, in the Essays in Monetary Theory of his onetime collaborator-turned-critic, D.H. Robertson). For all that, the alleged phenomenon of the ‘Liquidity Trap’ came to assume in the post- War world a huge theoretical burden in justifying Keynesian Revolution. Remarkably, since in 2007 its galvanised corpse has been hastily twitched in the hope of it playing similar role in today’s second Keynesian revolution. 
But what is the Liquidity Trap all about? It is not something that can be unpacked in one line, or a single  paragraph. For all that, the quarry can be brought to ground, without mystery or evasion. And it is right to do so; for it is right the take the measure of this portentous conception.
The starting point of the Liquidity Trap scenario is that any self-correcting potential of the market economy will rest on the competition for jobs by workers in a situation of unemployment. This competition will reduce money wage, and so money prices; and all money holders will have larger money balances in real terms than they did before. People, however, need only a certain amount of money in real terms to execute the transactions they wish. The upshot is that competition for jobs will not increase employment in the first instance, but will certainly leave everyone with real money balances in excess of their needs.  Therefore,  it must be in the subsequent equilibration of the money market that any ‘self-correction’ is engendered.
So we are led to ask: how is equilibrium in the ‘money market is restored’?
Keynes provided one answer.  It rests on the notion that money is held not only for the sake of executing transactions, but also for what he called the ‘speculative motive’; that is, the wish to optimally manage one’s wealth. But why would anyone hold money for the sake of managing one’s wealth, given that money’s nominal return is always zero?  The answer lies in the fact that to be always zero is never to be negative. And there rests the idiosyncratic appeal of money; its zero rate may be low, but it will exceed the negative rate that bonds will pay whenever their prices fall sufficiently to outweigh their coupon. Thus, while those who expect bond prices to rise (call them ‘bulls’) will certainly not hold money out of a speculative motive, those who expect bond prices  to fall (‘bears’) will (to ignore the coupon) willingly put all their wealth in the form of money, and hold no bonds at all.
It was Keynes' view that excess supply of money created by the competition for jobs will set in motion a trade between bulls and bears which will restore money market equilibrium. For while  bears welcome  their increased real money holdings resulting from falling wages,  bulls, by contrast, decry their increased real money holdings as a sub-performing investment. But the bulls ‘excess supply of money’ can be corrected by a certain rise in bond prices. For any rise in bond prices will makes bears of some former bulls – since to some former (and not so bullish) bulls the rise in bond prices  will entail –as a matter of arithmetic  - that the level of bond prices this period will now stand higher than the level they expected for next period. And this engenders a demand for money in such new-made bears. And not only do they now willingly hold on to their increased supply of money; they also now wish to sell what bonds they have in exchange for money.  And the bonds for sale of these new-made bears will be gladly bought by the remaining ‘hold out’ bulls with their own unwanted real balances. 
It is easy to see that there will be some rise in bond prices such that a sufficient number of bulls are ‘converted’ into bears so that the initial excess supply of real balances is now absorbed by a expanded ‘speculative demand’ of  bears, both old and new-made.
Thus the money market is restored. But there is another consequence. The higher bond price amounts to a lower yield on bonds. Consequently investment  in plant and equipment will increase, so as to reduce the return on capital to the newly reduced yield on bonds. And that increase in investment will increase GDP and employment.
Thus in the end the fall in money wages has reduced unemployment. Self-correction!
If there still remains unemployment after the assumed wage cut then the process can be repeated. Clearly as this process continues, speculative money holdings will swell ever more across an ever increasing population of bears, and bonds will be  increasingly concentrated in dwindling population of hold-out, ‘never say die’, bulls.
But what if there is, say, just one bull left? Consider this solitary bull, now holding all bonds. If at the existing price of bonds investment (in plant and equipment) is large enough to secure full-employment; then well and good. But what if there is still unemployment? What will a further round of money wage reductions do the trick? No. Everyone will have increased real balances, as before, and the bulls (that is, the bull) will not want to hold that increase, as before. But the difference is that the last remaining bull cannot now be converted into a bear; because for him to become a bear someone would have to buy his bonds  he would now not want. And  there no one left to do that! So what happens? The price of bonds rises - but not until the bull has become a bear; rather , it rises only so far as to make the bull indifferent between bonds and money. And that restores equilibrium. The bears hold more money than ever, but that is OK by them; and the solitary bull by becoming ‘a deer’ – and believing the bond price  will neither rise nor fall - is indifferent between bonds and money, which is to say they have no objection to the extra money they hold.
But the key point is still to be made: that bond price at which the last bull becomes a deer  constitutes a ceiling to the bond price. The bond price cannot rise any further. If wages fall again, then real balances will rise gain; but that creates no excess supply of money. For the bears are glad to hold the increased real balances,  and the deer at the previously secured bond price is  content to hold the increased real balances. The bond price has hit a ceiling; and the bond ‘yield’ has struck a floor, and the long rate of interest can go no lower.  And if that long rate is such that investment is insufficient to employ the whole work force ... then unemployment will remain no matter how much money wages are reduced.
Such is the liquidity trap story.
What to make of it?
The story evidently is of some intricacy, but is intelligible for all that.
Its weakness is that is that it turns critically on two assumptions have no purchase on our assent. First, that bond holders are certain of their forecasts; and, two, that expected inflation remains zero throughout any deflationary adjustment.
That bond holders are supposed certain of their forecasts is essential to the feat by which a zero rate on money entails a positive floor on the long rate of interest. For it is existing bond holders all agreeing with perfect confidence what the price of bonds will be next period that makes money and bonds perfect substitutes at some critical current bond price; it is perfect confidence that makes wealth holders content to hold any amount of money at that critical bond price. But as soon as we suppose wealth holders allow for range of possibilities for the bond price next period, then money and bonds will never perfect substitutes, and the only way to persuade wealth holders to hold more money is to increase the bond price. (This point was made clearly by James Tobin in ‘Liquidity Preference Towards Risk’ in 1958 in the wake of portfolio choice theory being transformed by the theory of choice under uncertainty).
That expected inflation is supposed to remain zero throughout any deflationary episode is also essential to any liquidity trap story. The nominal rate of return of investment consists of a real component (determined by technology) and a nominal component, amounting to expected inflation. Wage and price reductions cannot affect the real component, and by Keynesian assumption cannot affect expected inflation. But is this assumption valid? Is it not possible that a reduction in current prices will not drag down expected prices by the exactly same proportion? If this is possible then a reduction in current prices will leave expected prices somewhat above current prices, and thereby create an expectation of positive inflation. And that amounts to an increase the nominal yield on capital. In other words, a cut in money wages in the current period can directly shift up the prospective nominal rate of return on investment, and so increase investment for an unchanged nominal interest rate, and so restore the equilibrating effect of a competition for jobs.
The liquidity trap, then, is not only an intricate structure, it is a fragile one.
Or is flimsy the better word?

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