It is a very human trait for those who claim to know things to try to impose their beliefs on others, no matter how wrong these may be.
Keynes is an example. He is widely misunderstood, and his name has become a facile label. His writings were much more complex, and his ideas are misrepresented. Krugman, for example is no Keynesian. He has to be labeled something else, a neo-Keynesian I think, because his ideas about stuffing the economy with stimulus are simply not Keynes ideas. I think he would be appalled to see that his name is attached to Krugman's.
Keynes as far as I can tell stood for small stimulus, not massive. Writing in the midst of the Depression, he said that the world economies suffered from a 'magneto problem', i.e., they needed a spark, not an overhaul.
I found this blog post regarding Keynes written by a macroeconomist in 2006. I think he generally gets it, but makes some very serious errors at a time when anyone with any sense of judgment could see that major macroeconomic problems were on the horizon [sheez, even I wrote this in 2005: Message 21528255 and siliconinvestor.com ]
I am now quoting the concluding paragraphs of the artice, which is long and a bit dense, but there are substantial problems and errors visible in the rear-view mirror, especially as they relate to Japan and the ZIRP environment in which we live and will live for at least 3 more years. We are the New Japan IMO:
economistsview.typepad.com
Why was Keynes wrong?
Part of the answer is that he underestimated the ability of mature economies to stave off diminishing returns. Keynes’s “euthanasia of the rentier” was predicated on the presumption that as capital accumulates, profitable private investment projects become harder to find, so that the marginal efficiency of capital declines. In interwar Britain, with the heroic era of industrialization behind it, that view may have seemed reasonable. But after World War II a combination of technological progress and revived population growth opened up many new investment opportunities. And even though Ben Bernanke, the new chairman of the Federal Reserve, has warned of a “global savings glut,” the euthanasia of the rentier does not seem imminent.
But there’s an even more important factor that has kept interest rates relatively high, and monetary policy effective: persistent inflation, which has become embedded in expectations, and is reflected in higher interest rates than we would have if the public expected stable prices. Inflation was, of course, much higher in the 1970s and even the 1980s than it is today. Yet expectations of inflation still play a powerful role in keeping interest rates safely away from zero. For example, at the time of writing the interest rate on 20-year U.S. government bonds was 4.7%; the interest rate on 20-year “indexed” bonds, whose return is protected from inflation, was only 2.1%. This tells us that even now, when inflation is considered low, most of the 20-year rate reflects expected inflation rather than expected real returns.
The irony is that persistent inflation, which makes The General Theory seem on the surface somewhat less directly relevant to our time than it would in the absence of that inflation, can be attributed in part to Keynes’s influence, for better or worse. For worse: the inflationary takeoff of the 1970s was partly caused by expansionary monetary and fiscal policy, adopted by Keynes-influenced governments with unrealistic employment goals. (I’m thinking in particular of Edward Heath’s “dash for growth” in the UK and the Burns-Nixon boom in the US.) For better: both the Bank of England, explicitly, and the Federal Reserve, implicitly, have a deliberate strategy of encouraging persistent low but positive inflation, precisely to avoid finding themselves in the trap Keynes diagnosed.
Keynes didn’t foresee a future of persistent inflation (nor did anyone else at the time.) This meant that he was excessively pessimistic about the future prospects for monetary policy. It also meant that he never addressed the policy problems posed by persistent inflation, which preoccupied macroeconomists in the 70s and 80s, and led some to proclaim a crisis in economic theory. (In fact, the models many of us use these days to explain the persistence of inflation even in the face of unemployment, notably “overlapping contracts” models that stress the uncoordinated nature of wage settlements, are quite consistent in spirit with what Keynes had to say about wage determination.) But failure to address problems nobody imagined in the 1930s can hardly be considered a flaw in Keynes’s analysis. And now that inflation has subsided, Keynes looks highly relevant again.
The economist as savior
As an intellectual achievement, The General Theory ranks with only a handful of other works in economics. I place the highest value on economic theories that transform our perception of the world, so that once people become aware of these theories they see everything differently. Adam Smith did that in The Wealth of Nations: suddenly the economy wasn’t just a collection of people getting and spending, it was a self-regulating system in which each individual “is led by an invisible hand to promote an end which was no part of his intention.” The General Theory is in the same league: suddenly the idea that mass unemployment is the result of inadequate demand, long a fringe heresy, became completely comprehensible, indeed obvious.
What makes The General Theory truly unique, however, is that it combined towering intellectual achievement with immediate practical relevance to a global economic crisis. The second volume of Robert Skidelsy’s biography of Keynes is titled “The economist as savior,” and there’s not a bit of hyperbole involved. Until The General Theory, sensible people regarded mass unemployment as a problem with complex causes, and no easy solution other than the replacement of markets with government control. Keynes showed that the opposite was true: mass unemployment had a simple cause, inadequate demand, and an easy solution, expansionary fiscal policy.
It would be a wonderful story if The General Theory showed the world the way out of out of depression. Alas for romance, that’s not quite what happened. The giant public works program that restored full employment, otherwise known as the Second World War, was launched for reasons unrelated to macroeconomic theory. But Keynesian theory explained why war spending did what it did, and helped governments ensure that the postwar world didn’t slip back into depression. One can identify a number of occasions, most notably Japan in the 1990s, where depression-like conditions might well have returned without the guidance of Keynesian economics.
There has been nothing like Keynes’s achievement in the annals of social science. Perhaps there can’t be. Keynes was right about the problem of his day: the world economy had magneto trouble, and all it took to get the economy going again was a surprisingly narrow, technical fix. But most economic problems probably do have complex causes and don’t have easy solutions. Of course, I might be wrong. Maybe there are narrow, technical solutions to the economic problems of today’s world, from lagging development in Latin America to soaring inequality in the United States, and we’re just waiting for the next Keynes to discover them.
One thing is certain: if there is another Keynes out there, he or she will be someone who shares Keynes’s most important qualities. Keynes was a consummate intellectual insider, who understood the prevailing economic ideas of his day as well as anyone. Without that base of knowledge, and the skill in argumentation that went with it, he wouldn’t have been able to mount such a devastating critique of economic orthodoxy. Yet he was at the same time a daring radical, willing to consider the possibility that some of the fundamental assumptions of the economics he had been taught were wrong.
Those qualities allowed Keynes to lead economists, and the world, into the light – for The General Theory is nothing less than an epic journey out of intellectual darkness. That, as much as its continuing relevance to economic policy, is what makes it a book for the ages. Read it, and marvel |
