Exploding Some Callahan Confusions

How can you truly have a complete July 4th experience without exploding a few Gene Callahan absurdties?

Over at Bob Murphy's blog, there is an interesting exchange between occasional EPJ commenter Bob Roddis and the Rothbard-hater Callahan:

Roddis writes in a comment:

It doesn’t hurt to repeat it over and over. The essence of Keynesianism is to trick people into accepting lower real wages with inflation because they are allegedly too dumb and stubborn to lower their wages on their own without the helping and guiding hands of Keynes and Kuehn.
Put that on the Keynesian Party election sign high over Times Square.

Callahan replies to Roddis:

"The essence of Keynesianism is to trick people into accepting lower real wages…”

Bob, you [sic] ignorance is only exceeded by the belligerence and arrogance with which you display it.

But is this such an ignorant comment by Roddis or is Callahan the ignorant and arrogant one? It has always seemed to me that the idea expressed in Roddis' comment was true: That Keynes favored inflation as a method to reduce unemployment because he believed  people could be fooled into taking a lower real wage by creating an environment where nominal wages were higher.

Indeed, an EPJ reader points out to me that this is exactly Hayek's view of Keynes. This is from the compilation edited by Sudha Shenoy, A Tiger By the Tail, p.68.

 The decisive assumption on which Keynes’s original argument rested and which has since ruled policy is that it is impossible ever to reduce the money wages of a substantial group of workers without causing extensive unemployment. The conclusion which Lord Keynes drew from this, and which the whole of his theoretical system was intended to justify, was that since money wages can in practice not be lowered, the adjustment necessary, whenever wages have become too high to allow ‘full employment’, must be effected by the devious process of
reducing the value of money. A society which accepts this is bound for a continuous process of inflation.

Further, does Callahan think that the always respectful Hayek became suddenly belligerent and arrogant when discussing Keynes' take on wage rates, since he made the same argument as Roddis?

While we are examining Callahan thinking, this Fourth of July, let's take a look at his recent comment on Rothbard's critique of the multiplier. First, it must be noted that Callahan lays out the equations in Rothbard's critique in a confusing fashion. He writes:

 Let us say the equation arrived at is: V = .99999 Y
Then, Y = .99999 Y + R
.00001 Y = R
Y = 100,000 R

This is actually what Rothbard writes in Man, Economy and State:

Let us say the equation arrived at is: V = .99999 Y

Then, Y = .99999 Y + R


.00001 Y = R
Y = 100,000 R

Callahan then writes:

 Of course, what has been ignored is the relationship of R to V.

First off, on a very basic level, does Callahan understand anything about equations? Just how does Callahan think that Rothbard has "ignored" the relationship of R to V?

Rothbard defines his symbols this way:

Social income = Y
Income of the Reader = R
Income of everyone else = V

Rothbard then starts off his series of equations by stating V=.99999 Y. He then shows that Y=100,000 R, which means in Rothbard's initial equations we can replace Y with 100,000 R. Thus V= .99999(100,000 R)

Rothbard hasn't ignored anything.

The point Rothbard is trying to make seems to fly completely past Callahan. Rothbard is pointing out that by making R a constant percentage of Y, you can reach some pretty absurd conclusions. This is exactly what Keynesians do when they attempt to make consumption a stable function of income. Indeed, Callahan even tells us Keynesians make this assumption:

In the simplest version of the Keynesian multiplier story, an essential element is that C remains a constant percentage of Y[...]

BUT, Callahan tells us this by implying that Rothbard fails to consider this. Callahan writes:

Of course, what has been ignored [by Rothbard] is the relationship of R to V. In the simplest version of the Keynesian multiplier story, an essential element is that C remains a constant percentage of Y (ignoring autonomous consumption) regardless of what happens to G or I. Therefore, an increase in G or I must lead to enough of an increase in C to keep that percentage where it was.

Does Rothbard fail to get this or consider this? Two paragraphs above where Callahan quotes Rothbard from MES, Rothbard writes:

The theory of the "investment multiplier" runs somewhat as follows:

Social Income = Consumption + Investment

Consumption is a stable function of income, as revealed by statistical correlation etc. 

So, yeah, if you don't fully quote Rothbard, it may appear he doesn't take something into consideration that he does two paragraphs earlier.

Callahan goes on to tell us this is all some kind of a Rothbard trick:

[I]f we look at the relationship of R to V, we would expect to find that they vary inversely: If my income was .00001 Y and it doubled the next year, the income of everyone else simply dropped to .99998 Y. Rothbard has played a trick here: because V is such a huge percentage of Y, he can claim it is "a completely stable function of Y." But the correct thing to look at is: When R changes, does V respond so as to maintain its ratio to Y?

Duh, no kidding. That is Rothbard's point, he is using, as he states in his argument, a reductio ad absurdum:

The following is offered as a far more potent "multiplier," on Keynesian grounds even more potent than the investment multiplier, and on Keynesian grounds there can be no objection to it. It is a reductio ad absurdum, but it is not simply a parody for it is in keeping with the Keynesian method.

Rothbard is attempting to get us to take a look at the "trick". It takes the same form as the Keynesian mutiplier "trick", that is, the Keynesian multiplier with its assumption of consumption as a stable function of income. There is no such real world stability between consumption and income, any more than there is in Rothbard's   reductio ad absurdum argument. Callahan's attack on Rothbard's  reductio ad absurdum may be the first time in history of argument that someone has attacked a  reductio ad absurdum for being absurd!

On some level Callahan knows this because in slippery language he hints that there is no constant Keynesian multiplier relationship between consumption and income:

[...]that may be an invalid assumption, but Keynesians have a story as to why we'd expect something like that to happen, and then they actually go and do empirical work to discover to what extent it really does happen.

Got that, "may be an invlalid assumption"? Which is exactly what Rothbard is pointing out, that it is an invalid assumption. But, instead of attacking the Keynesians for such, Callahan attacks Rothbard for pointing out the absurdity of it all, and then  he  tries to justify why the Keynesians can make their invalid assumption because they "have a story"  and use improper methodology:  "they actually go and do empirical work."

When you are a Rothbard hater, you really have your work cut out for you, he rarely made mistakes despite being extremely prolific. When the haters have to reach down and attack Rothbard for being absurd, when he is making a reductio ad absurdum argument, you know they  are desperate.