“If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics.”

-N. GREGORY MANKIW

>

In today’s Washington Post, Dana Milbank pens a column “John Maynard Keynes, the GOP’s latest whipping boy.” It might as well have been called: What of Keynes?

The argument about how best to respond to the economic crisis — Tax cuts? Deficit spending? Monetary intervention? — is largely premised on the Keynesian view that government should somehow boost demand in a recession. The alternative is for the government to do nothing, something politicians are unlikely to embrace.

Consider:

-That public purse strings should be used counter-cyclically is a very Keynesian concept.

-The idea that demand is an important driver of the economic cycle” — aka Keynesianism — “is uncontroversial” according to Greg Mankiw, George W. Bush’s former chairman of Council of Economic Advisors.

-Keynes’s place in economics is similarly unassailable.

-Economists offering alternatives to Keynes claimed markets behave efficiently. Those ideas collapsed — along with everything else — in 2008.

-With business and consumers refusing to spend, Keynesian theory says it’s up to the government to stimulate consumption — by spending more or by using tax cuts to stimulate demand.

-Does the GOP have new ideas of their own? Their assault on Keynes does lend credibility to the charge that Republicans can only push back against other (original) thinkers, and have no new ideas — at least, none since Reagan.

CrowdQuery:  What is Keynes place in modern economic thinking? What policies is Keynes directly — and indirectly — impacting ?How important is Keynes to modern economic theory ?

NOTE: I care less about the politics than I do the economics. Stay focused on the policy and economic considerations, and not cheer-leading your favorite politico…

Category: Economy, Politics, UnScience

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

89 Responses to “CrowdQuery: What of Keynes?”

  1. foosion says:

    Krugman draws the distinction between saltwater and freshwater economists (i.e., those on the coasts and those in the middle of the country). Saltwater economists study Keynes, freshwater have largely forgotten him.

    The rational expectations theories and their progeny have largely supplanted Keynes in much of contemporary economic thought.

  2. DanielHess says:

    I totally disagree that there is one top economist to understand what is going on. There are two.

    The other is Milton Friedman.

    His solution would be, let the economy do what it will but be prepared to print as much as necessary to stop the money supply from contracting.

    If the money supply does not collapse y0u do not a deflationary depression, or a downward spiral. Also, with the Friedman solution, you do not get the huge government debt overhang that you are stuck with under Keynes.

  3. philipat says:

    What we see today is NOT Keynes theory. Keynes set forth that Governments should run defecits during bad times AND run surpluses during good times. Can you imagine the US Congress in its present form ever running a surplus?

  4. NormanB says:

    There were two parts to Keynes’s prescription for saving an economy. The first one, which is all people discuss, is that the government fill in for slack demand, ie run deficits. But the second part is not PC to mention but I will anyway: After the economy is on its feet then government is supposed to run SURPLUSES to mop up the debt.

    So, Keynes wasn’t the crazed economist some make him out to be. He was quite rational but the abusers of his theory aren’t.

    BR: Your are an economist. What say you?

    ~~~

    BR: I have been saying that ad nauseum — during the expansion is when government should be raising taxes and cutting spending, letting the private sector carry the ball. The problem is, the political opponents of tax increases and/or spending cuts will hold elected officials “accountable for the inevitable cyclical recession.

    Hence, our political system encourages excess spending and unfunded tax cuts pretty much all the time

    PS: I am not an economist, I only play one on TV . . .

  5. VennData says:

    To paraphrase Larry Homes, Keynes isn’t fit to carry Arthur Laffer’s jockstrap.

    Supply Side economists has been able to get some people believe that tax cuts will actually decrease the debts and deficits, and after two failures under Reagan and Geoege W. Bush, still has them believing.

    Since economics is a pseudo-science, Laffer is the pseudoist of them all.

    P.S. to anyone who has waited for the data to make the decision on tax cuts for the rich…

    Rich Americans Save Tax Cuts Instead of Spending

    ~~~

    BR: A get your point, but Keynes had a finer understanding of markets and the economy and Human behavior than pretty much any economist since. Thats what makes his writings so interesting

  6. rip says:

    By my recollection, if you had attended a macroeconomics class taught by Dornbusch (sp?) at the University of Chicago, you would have known that a huge part of Keynes theory was about money, the types and its velocity, and how government can or should influence that.

    So, IMHO, there is a lot of overlap between Keynes and Friedman. More than most chose to acknowledge because they prefer political polarization. Or economic elitism.

    If you wanted to see a depression or hyperinflation in the US all you would need is a bunch of “Friedman-ites” in control. How did his work in South America turn out?

    So, it seems our choices are Keynes or Malthus. I prefer to see Keynes’ ideas work, but am doubtful. The federal pendulum never seems to make it back to spending less.

    If not Keynes, who?

    So I guess that makes him pretty important.

  7. rip says:

    Ooops. Forgot Simon Johnson. People need to pay attention to him and heed his advice.

  8. subscriptionblocker says:

    Keynes?

    No different than any other religion. They all have their successes – then spend the rest of their days trying to relive them. Kinda like investment advisers :)
    Collectively, we probably don’t know how to fix this mess. Eventually it will go away and we’ll forget the question.

    ~~~

    BR: My nominee for least insightful comment of the day. A tragic waste of good electrons.

  9. cfischer says:

    PhilipAt and NormanB beat me to it. What we’ve seen during the last decade has not been Keynesian economics, but a perversion of it which amounted to little more than using it as an excuse. I would love to see how it would work if our politicians had the competence and integrity to raise taxes/lower spending during the “good times”. Knowing that will never happen, I’d honestly prefer they did nothing (but that will never happen either.) So we get the worst of both philosophies, in my view.

  10. clawback says:

    What Mankiw calls “uncontroversial” — that the economy can be modeled in terms of “aggregate demand” — is the heart of the problem.

    Here’s what Steve Horwitz (a real live economist) has to say about the problems with demand-boosting fiscal policy. He focuses on the micro-economic problems that conventional macro overlooks:

    “This problem is magnified when we take seriously the heterogeneity of both capital and labor and that the “right jobs” will be the ones that fit with the structures of human and non-human capital available to be worked with. When the focus is on the number of jobs and the resulting, hoped-for, increase in GDP, then it doesn’t matter what labor and capital is activated. Any ol’ jobs and capital will do for increasing GDP (or reducing unemployment!). But when the focus is on, oh say, economics as a coordination problem, then it matters a lot what the microeconomics looks like. (In fact, I wrote a whole great big book on this topic published by a company that publishes real, actual economists, so I guess they’re guilty of malpractice too.)

    Put differently: it is not a priori true that the economy is “better off” by activating idle human and non-human capital just for the sake of generating wage and rental payments, as opposed to leaving them idle until they can find employment that enables them to complement the structure of production and produce goods and services that people actually want. This process of “re-figuring out” what the post-boom economy should look like is what Arnold Kling has nicely termed “the great recalculation.” The stimulus and the bailouts and all the rest cut short the social (re)learning process that is necessary to a sustainable recovery from the boom and resulting bust. “

  11. JT23456 says:

    “public purse strings should be used counter-cyclically”

    That would be fine except the morons in DC don’t understand counter-cyclical – they spend and spend and spend – and then they spend some more.

    Did Keynes actually know he was giving them license to spend – or did the DC morons become tone deaf to the last part and only hear “public purse strings should be used” ??

    Did anyone ever hear of a politician of any stripe that had spending fatigue?

  12. JasRas says:

    Keynes is the man. The fact we can only follow his advice in bad times is our problem.

    Here’s an interesting thing to chew on: Who owns most our U.S. debt? (foreigners) What happens to said debt when we fire up the printing presses? (it’s devalued) Whose money are we using to dig ourselves out of our problems? (theirs) What is happening to U.S. total debt (all in: govt, public, corp, private)? It’s going down… Are we becoming better off or worse off right now? Look at usdebtclock.org and decide for yourselves…

  13. MinnItMan says:

    My question is whether surpluses are all they’re cracked up to be. Back in the 90s, nobody believed a surplus was possible until it happened (the last one being in 30 years before in 1969). I’m not suggesting causation or anything really, but surpluses do seem to coincide with a lot of events that suggest bad times ahead. I also remember thinking that the balanced budget amendment was a terrible idea based upon right-ish arguments, that is, economists who didn’t think Keynes was all that wrong, but rather that his ideas gave too much cover for people like Nixon (or any Democrat).

    I do remember vauguely a WSJ op/ed (back when I didn’t dismiss virtually everything on that page – was it really better then?). Anyway, the point was that our financial system doesn’t work when there is no cost of federal debt as a benchmark.

    I’m not an economist, but I do think they are generally very smart, but nuts. They know a lot, but don’t know what we really want/need to know. And they can’t predict the present.

  14. philipat says:

    @Cfischer

    Amen. Perversion of Keynes does indeed provide further raison d’etre for the Austrian approach.

  15. clawback says:

    All of these cracks about “Friedmanites” and “Chicago school” sound like stuff you hear on left-leaning websites. Monetarists and Keynesians are hardly at odds with one another in terms of economic theory. That battle is politics, not economics.

    These guys talk about real alternatives to Keynes (and Friedman) every single day.
    http://www.coordinationproblem.org/

    I don’t understand the focus on Friedman, unless he’s just a whipping boy for everything people hate about Reagan or Republicans in general.

  16. bhh19 says:

    The problem with constantly defending Keynes is you inherently defend the politicians who are in power at the time the stimulus is implemented; they are the ones who pull the trigger–so, Barry, you cannot seperate economics and politics under this scenario. Do the math on the money spent since 2008 per job created. The numbers speak volumes about how massive of a waste this has been. Clearly, the pols have failed in the most effective allocation of the sitmulus money. So, for me, i’d rather see failures punished and slates cleaned versus proping up AIGs with created dollars. (not to mention the debt overhang that exists for years) I predict that when this is all said and done JMK’s policies will be discounted considerably because of the way his theories have been implemented and dollars allocated. JMK is inherently flawed becasue of the vehicles and avenues that are required to be used to implement his artificial demand are all to subjective–our elected officials.

  17. tawm says:

    >The alternative is for the government to do nothing,

    Talk about ideological blinders. That is NOT the only alternative. Why must you always mis-represent opposition to your advocacy of spend,spend,spend policies? Taking a hard look at, and cutting government spending is certainly another option — and probably sorely needed.

    ~~~

    BR: As noted above, you cut spending during expansions, not recessions.

    Counter-cyclical !

  18. Senior Programmer says:

    Keynes who? Another hack who says we can just pull some levers and let the good times keep rolling, and never have any pain? Oh, just our kids have to endure the pain. That’s really moral.

    Seriously, the Jews had this figured out THOUSANDS of years ago, folks, with the Jubilee year. They knew that things would get too fucked up and you just need a reset of the system. Unfortunately, that only applied when you’re Jewish and on the wrong end of the situation. Nowadays we just hear about 1. more debt 2. unlimited bailing out of the fat cats. Big progress to show for 3 thousand years of critical thinking, huh?

    Not that I really care any more. People usually get what they deserve. I just can’t stand morons like Keynes being exalted in rational spheres.

  19. DanielHess says:

    @rip –

    Friedman and Keynes had fundamentally different modes of operation. Friedman’s mode of action was the Fed. Keynes’ was the Congressional purse strings.

    Note that the Fed’s gigantic QE gun in March of 2009 pretty much stopped the downward deflationary spiral.

    El Erian said at that time “The numbers are horrifying.”
    http://singapore.pimco.com/LeftNav/Viewp oints/2009/Viewpoints+Newsweek+Mohamed+E l-Erian+January+17+2009+Numbers+Horrifyi ng.htm
    For El Erian to be horrified, things can’t have been good at the time.

  20. DanielHess says:

    Friedman stands on the shoulders of Keynes, to be sure.

  21. pintelho says:

    to waste some more electrons…as has already been mentioned…the key to Keynes is to run surpluses in good times to pay for the debt stimulus in bad times…

    but we don’t do that so well…

    how about having publicly funded elections that may relieve the pressure on the politicians to do stupid shit to please their corporate masters despite the anti-Keynesian backlash of said stupid things.

  22. Haigh says:

    Robert Arnott published a scatter plot graphing Growth in Private Sector GDP vs Growth in Outlays. It suggests there is no evidence general government outlays drive up private sector GDP.

    http://www.realclearmarkets.com/articles/2010/03/10/whats_gross_about_our_gross_domestic_product_98378.html

    He throws down the gauntlet:

    “Much of the world is now pursuing a policy experiment that (1) has been tried repeatedly without success, (2) has highly significant – and discouraging – historical evidence, and (3) is now being tried on unprecedented global scale. The exit strategy is ambiguous or absent; we’re borrowing with no clear means to repay our debts.”

  23. Both parties are Keynesian, the Republicans just do it by cutting taxes and boosting demand that way.

    Martin Wolf has long argued the US is the Most Keynesian OECD country because the lack of a social safety net requires growth.

    The problem with Keynesian implementation in the US is it’s distributed through the ‘skim’ of the private sector, whether it be banks or contractors rather than direct government hiring.

  24. Neil C Denver says:

    Keynesian economics may no longer work as it did during the 1930s because much of the money pumped into today’s economy is being spent on foreign products, not American.

    In the long run, ‘macro’ economics theories can work ONLY if they are supported by ‘micro’ economics. Unfortunately, it is beneath the dignity of many academicians to think about ‘real’ economics and ‘unintended consequences’. So be it.

  25. bobmitchell says:

    Good news, there is another guy to blame. I heard someone on fox news talking about him. He kept blaming all of the problem on Kenesians. Pronounced, KEN-E-SIAN.

    Lets blame him.

  26. Curmudgeon44 says:

    I’m a fan of Joseph Schumpeter. All we’ve done during the recent unpleasantness is to take the *creative* out of destruction….

  27. crjdriver says:

    Marxism would work lovely also if everybody just obeyed the rules ,just like Keynesians are supposed to obey the rule of run surpluses during good times. Because of that, I pretty much view Keynsian economics as unworkable in the log run because of the human nature of democracies to spend themselves into oblivion.

  28. constantnormal says:

    Off Topic (a bit) … Zero Hedge ran a piece today which asserted that only 112 stocks made up over half the trading volume today. Is this because most of the trading now takes place in dark pools, and is unreported, or if not, what does this say about the state of our markets? Has all the action migrated to the bond markets?

    Is Keynes (or any other economist) even relevant in such an environment? Without a free and open marketplace, where assets are exchanged in an atmosphere of some degree of trust, can there even be an economy? Isn;t this not so very far away from the economy of the USSR, insofaras financial assets go?

    http://www.zerohedge.com/article/market-liquidity-update-112-stocks-now-account-half-days-trading-volume

  29. tradeking13 says:

    How are Keynesian counter-cyclical policies supposed to help when the problems with the economy are in large part secular/structural in nature like private-sector over-indebtedness and the effects of globalization including wage arbitrage, to name a few? Encourage consumers to take on more debt to buy stuff made in China? Retrain workers who will still be considered too expensive compared to their counterparts in Asia? I don’t see how this can possible work.

  30. S Brennan says:

    One note monkey says:

    Washington is binary, war…or tax cuts solve all problems…no need to trouble our beautiful minds with Barry’s “Off the Black” discussion about things that work.

    “Pharaoh had two dreams which disturbed him. He dreamt of seven lean cows which rose out of the river and devoured seven fat cows; and, of seven withered ears of grain which devoured seven fat ears. Pharaoh’s wise men were unable to interpret these dreams, but the chief cup bearer remembered Joseph and spoke of his skill to Pharaoh. Joseph was called for, and interpreted the dreams as foretelling that seven years of abundance would be followed by seven years of famine, and advised Pharaoh to store surplus grain during the years of abundance.”

    If you don’t believe in Keynes…you don’t believe in western thought…it’s just that simple.

  31. dsawy says:

    A question I’ve yet to see addressed in economic policy is the limit to Keynesian (ie, government-induced) demand to soak up excess capacity that has a demographic component.

    eg, look at Japan. Part of their economic problem is demographic, which Keynes did not live long enough to see. We all know of the post-war baby boom in the west and Japan, followed by a decline in birth rates. What most in the US don’t know is that in Japan, the decline in birth rates happened much faster and sooner than in the US, which I think has something to do with their situation now. The Japanese are, as a nation, aging very rapidly.

    When we look at economy-wide personal consumption stats, we see that as an age cohort goes into retirement and then old age, other than health care, old folks are past their prime consumptive years. eg, where we younger people might buy a new car every few years, older folks reach a certain age beyond which they’re really disinclined to buy a new car ever again. Same thing with houses.

    So in a situation like Japan’s (and in the US as the boomers age), with economies that have strong to very strong personal consumption underpinnings and pig-in-the-python demographic bulges, how is the government going to offset a demographic decline in consumption as a means of sustainable recovery? I don’t see how. The forces at work are larger than can be solved or even offset with Keynesian spending.

  32. cheapstocks says:

    Here on this blog today I read that the fact that stimulus spending equivalent of nearly 6% of DGP that may have raised GDP by 1 to 2% (and I stress may), is somehow something that should be considered a positive.

    Heck, clearly we should have spent 600% of GDP on stimulus, we could have almost doubled the economy only spending 6x the economy! Sign us up for more of this please.

  33. Yaun says:

    Keynes theory is sound. And in theory there is no difference between theory and practice. But, in practice, there is.

    You will rarely see a democratic government reducing spending during the good times. There simply is no incentive to do so. Maybe it would happen if we had 30 year election cycles. Keynes was intelligent enough to know it. That in spite of this insight, he sold his theory as something practical, instead of just as a economic thought experiment, clouds his legacy as an economist.

    Apart from that there is also the wider question whether the phase of the economic cycle where capacity utilization is low is undervalued, since it indeed has the benefit of erasing misallocated capital and thus freeing resources for more productive purposes.

    Keeping an economy constantly close to capacity utilization on the other hand, takes out the ‘darwinian selection’ and thus leads long term to an uncompetitive economy.

    In other words: Severe recessions are good once in a while. In order to prevent a depression.

  34. ywsimw says:

    BR says Keynes has “a finer understanding of [...] Human behavior than pretty much any economist since”.

    Yet he did not realize the danger of his policies : the fact that they would never be implemented correctly by the Humans running the system.

    Keynes said “In the long term, we are all dead” (and drew some conclusions from that).

    I think he forgot to add “But our children will still be living” (and did NOT draw conclusions from that).

    Summary : We abused Keynes ; now we must be reasonable, let Keynes rest for a while, work hard to pay back for our mistakes and not try to abuse him once again.

  35. FrancoisT says:

    “I totally disagree that there is one top economist to understand what is going on. There are two.

    The other is Milton Friedman.”

    One economist we ought to pay much more attention to is Steve Keen. Somehow, he seems to be among the very few that incorporate the crucial role of debt (private and public) in his best explanatory models.

  36. clawback says:

    Yes, Steve Keen has done some really original and insightful work — and he would point to the importance of JMK’s contemporary, Irving Fisher. Fisher’s concept of debt deflation helps explain a great deal about where we are and what .gov is doing about it. Recently, Keen argued that Bernanke totally misunderstands Fisher’s concept. For instance, Bernanke goes to ZIRP in an attempt to accommodate more and more debt, but the key insight from Fisher is that in the aftermath of a debt binge (in which economic productivity could not keep up) debt must in many cases be defaulted on/destroyed. Otherwise you get Japan.

    Another important economist, whose ideas are relevant to the way Keynesian ideas affect policy, is Robert Higgs. Higgs developed the concept of “regime uncertainty” — the idea that when a bunch of pols decide they’re going to “do something” about the economy, market participants (businesses, investors, et al.) are unable to make rational decisions about investment and hiring (how much is health care going to cost if we hire people?, what will our tax burden be?, what kind of tax credit gimicks will be available next quarter?, will the Volcker rule go into effect?…etc.) Higgs noted just yesterday that in spite of low rates in the corporate bond market, business investment is deeply depressed — to some extent because the legal and tax regime is so uncertain.

    Citing such evidence, Higgs writes:

    “Of course, for mainstream macroeconomists, such evidence means nothing. In fact, they hold it in complete contempt because (1) their formal mathematical models do not have a variable called “regime uncertainty,” and (2) even if they could be persuaded to take this factor into account, the canned data on which they rely—the product of the Commerce Department’s Bureau of Economic Analysis, for the most part—do not supply them with an “official” data set for their analysis. What you can’t measure, according to their “scientific” credo, does not exist. Their de facto motto (of which I have more than once been on the receiving end) is: you’ve got no formal model; you’ve got nothing.”

    Again, the notion that “aggregate demand” can be pushed and pulled, borrowed and spent, without considering the very real and significant micro-economic effects of such random pushing and pulling, helps explain some of the ineffectiveness of Keynesian (and pseudo-Keynesian) policy such as the “Fiscal Stimulus.”

  37. srickant says:

    Why not look at it in two different ways, the popular response of elected govt s is inherently Keynesian, spend more, stimulate and the reserve banks (or the fed) usually will look at monetary solutions.

    How we run the IMF is keynesian in its idea, have a rainy day funds to save and stimulate the country, though the end results that they ask for is freidman. Keynes will be first principles that most govts would go to as a first response to any economic disaster, maybe once that works/fails try out other things.

    Keynes will remain relevant.

  38. Investradamus says:

    Prof. Beckworth had an interesting piece today on the difference between AD-induced deflation and AS-induced deflation. He did happen to mention you as well, BR, along with Krugman and Grep Ip.

    “How Can It Be?”
    http://macromarketmusings.blogspot.com/2010/09/how-can-it-be.html

  39. miutbc says:

    everyone knows money taken from the inefficient private sector, laundered though the government back to unions has a 1.5 multiplier. how is this even debated. tax rates don’t matter, it’s all about shovel ready projects

  40. Ilya says:

    Keynes was a priggish little master of the dark arts who without the trailing winds of a central bank and the omnipotent ‘wisdom’ of a federal treasury would have spent his life lecturing to seagulls by the seaside.

    Without the ability to influence and control money printing and tax policy, his philosophy was impotent. Woe are we who have allowed the King/Imperium to take back the purse strings of State.

    Socialism used to creep. Now it gallops towards the abyss because central planners like Keynes wanted to ‘smooth’ the transitions between recessions and excesses. His ‘print the purse’ in bad times and ‘tax the abundance’ in good times belied his naivete as to how far the voting franchise had been expanded even during his own time. His student FDR understood the great facts of the day and embraced his vote getting dogma and used it to mire the U.S. in a depression that could have been over in 3 years…Alas.

    Markets must clear. They clear at a price that extinguishes prior mal-investments. If markets are rigged by government/social intervention then the trauma is extended. It may be ‘smoothed’ for political gain but it may also take a decade when only a few years are required.

    Why we debate the sainthood status of this or that fuzzy head is an interesting question in itself. A good historian and a practical politician will give you more insight than the rantings of all the dead economists. RIP to them, thank God!

    Serious money is sidelined awaiting the the outcome of the debate. Much of it is parked in hard assets but would jump at the chance to help markets clear. Think the RTC under Bill Seidman… The longer the Kenyesians print and intervene, the more attractive commodities become. Allow the markets to clear and the multiplicitive power of Capitalistic Western Money Thought will attract huge amounts of sidelined capital back to productive purposes.

    Keynes was a well meaning bloke and as well meaning blokes go, he went. Most university Dons should be incarcerated for our own protection…

  41. Lord says:

    Keynes is still the father of macroeconomics. I found this Macrocube, and the four following posts identifying the dimensions on which macro theories lie to be quite useful at placing Keynes in context. I still think Keynes, not to be confused with other forms of Keynesianism, was closest to the truth at times like these.

  42. river says:

    Although in the arguement between keynesians and austerians I think that the keynesians are much, much closer to being correct, I think it is a case where they both are probably wrong.

    Honestly, I think economics is just a complicated way to describe that times are good when you have some combination of population growth and technological advancement, and that when you don’t have those two things, and do nothing but consume, with different sectors competing against other sectors over how the money is distributed (right now, Health Care, college educators and technological companies are winning this contest), times are (or will be soon) a little more tenuous. The Keynesian prescription of burying jars of money and then paying someone to dig it up is nothing but an accounting trick, with the idea that the only problem that the economy suffers from is some sort of confidence issue. Paying money for nothing is inflationary, an accounting trick in a deflationary environment. Bill Gross with Pimpco had an article a few weeks ago talking about the need for constant population growth in a capitalistic system based on consumption and the need for constant growth, so this idea may be getting realized more and more going forward.

    The Keynesian diagnosis of “inadequate aggregate demand” that must be stimulated may be technically and factually accurate, but it sounds an awful lot like George Bush’s plea for American’s to go shopping post 9/11, which sounds strange coming from the likes of Paul Krugman and Brad DeLong.

    The fact that the “structural problems” (different than Structural unemployment) that caused this mess never makes it into the economic narrative describing inadequate demand is my biggest problem with the guys like Krugman and Delong . . . Steve Keen seems like he gets this and makes a lot of sense the one thing that I had read from him. The economic narrative that doesn’t sound at all like the world I live in gives me even further pause . . .

  43. nofoulsontheplayground says:

    Keynes’ methods appear to work best in an inventory correction cycle recession. During a deflationary debt restructuring his methods appear inept against the stronger currents of liquidation of debt.

    The Austrians have the upper hand every 70-years. The Keynesians have the upper hand every 17.6 years.

    When looking at charts, weekly trumps daily charts, and daily charts trump hourly. In macro economics, 70-year cycles trump 17.6 year cycles.

    I’m extremely bullish from the year 2022 through the year 2036, and modestly so from 2018 through 2022.

    Things look very similar to April 2008 right now from index charts to commodities.

  44. “The two irreconcilable approaches in economics were typified by John Maynard Keynes and Ludwig von Mises. Their differences, as described by The Daily Capitalist:

    If you are a follower of J. M. Keynes, then the reason we have business cycles is “animal spirits.” Not a very satisfactory answer from such a lauded economist. All of a sudden, for no apparent reason, our animal spirits, greed or whatever, turn loose and we create booms and busts. Keynes just couldn’t think it through very well.

    Fortunately, Ludwig von Mises did. In 1912 he wrote his famous The Theory of Money and Credit which is a groundbreaking study of money in the Austrian tradition. It looks at individual action rather than “national” economic quantities. Begun by Carl Menger, this Austrian School created what is now known as the Marginal Revolution. It rejects the aggregate approach of looking at the economy such as espoused by Keynes. Keynes was an arrogant technician and liked the idea of manipulating things like national money supply, national demand, nationalwages, and like. Austrians view the economy as the behavior of billions of individuals (Mises referred to this as “human action” or by the Greek name he invented, “praxeology”). Good luck, the Austrians say, trying to figure out what the multitudes are all up to at any given time.

    What creates the business cycle, says Mises, is the inflation of money and credit. Only the Fed can do that. This is the key ingredient that Keynes and many Classical economists missed. Turn lose the money spigot and it will flow where opportunity exists. Flood the economy with money and of course greed will occur. So will a boom and bust.

    Yes, I know this is quite technical. But the point is that Mises and the Austrians have discovered something quite extraordinary and it was rejected by Keynesian technocrats, now called econometricians, who like national aggregate concepts because they want to control the economy. The only problem is that they don’t know how to do this and their nostrums have never worked in real life. They think that we humans are just some dumb tool to manipulate, sort of a mechanistic, Newtonian view of human behavior. I think we all know that we aren’t “units.” If there ever was a maxim to capture this it would be “I think therefore I am … going to do what I damn well please, so piss off!”
    http://www.economicnoise.com/2010/05/03/mises-vs-keynes/

    but, you know, past that, let us Forget all about the Mathematical Impossibilty that Central Banking–Lending our Currency, at Interest, into Existence–presupposes..
    http://www.thefreedictionary.com/presupposes
    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Keynes+vs.+Mises

  45. muckdog says:

    There is no political will to follow Keynes. If you run on hiking taxes or cutting spending, its the last campaign you’ll ever run. So we run deficits in good times and bad times.

    I think both political parties are deficit spenders. They have to make promises to voters, lobbyists, and folks who donate large sums of money to their re-election campaigns.

    I doubt many of them know much about economics. They’re experts on fund raising, not economics.

    So more and more promises are made. From your retirement, to your health care, and to whatever else you need. The belief is that there is an endless pot of money out there to meet all your needs without you having to worry about it. And that’s true as long as folks and other countries are willing to loan us the cash.

  46. philipat says:

    Why not simply pass a Balanced Budget amendment? That would do away with Keynes in a more constructive way by at least keeping Congress under some semblance of control.

  47. ToNYC says:

    As it was in the late stages of the BSC and LEH, any truth was ignored or shown the door, any justification was embraced to continue the current cash flow. Keynes’s dreams fed the crack credit creators in the hope that late on the adults would set things right..ie tighten up, pay down in surplus. Surplus and growth are as important as deficit and contraction, being essential properties of a living, sustainable system. We need to implode some wrecks and start over, but the stupid G.C.s in charge orders up buckets of spackle as they buy their tickets out of town.

  48. judderbar says:

    “philipat Says:

    September 13th, 2010 at 8:54 pm
    What we see today is NOT Keynes theory. Keynes set forth that Governments should run defecits during bad times AND run surpluses during good times.”

    Seems so. And if people cannot see that then they are not qualified to attack keynes so hatefully.

  49. Simon says:

    IMOP to understand the imbalances that have led to the current impasse you could go even further back. Adam Smith has ready explanations I think. I’m no scholar. I’ve waded through his book once only but it was this last year.

    In Wealth of Nations he talks about the mistake nations can make thinking that Gold is equivalent to wealth. He notes that a country can have all the gold on the planet and be dirt poor. He realized that the true wealth of a nation should be measured by it’s productivity the quality of public services available and the amount of services each of its citizens could afford. He gave the example of African chiefs controlling large territories and hordes of gold but living in grass huts with mud floors like everyone else. He compared this to the living conditions of the average citizen of England at the time. Noting that a moderately prosperous artisan would have superior quarters and food.

    Because gold was seen as wealth in and of itself nations would contrive that more gold would enter their borders than leave it. This tended to make trade difficult and the net result was fewer goods and services for everybody.

    This relates to our current predicament because it has been IMOP a similar mistake in the understanding of true wealth that has caused it. What we have seen in the last several decades is the stratification of society whereby the rich have got richer and the poor poorer. As far as the rich are concerned things could not be better and yet the reality is the nation as a whole has been getting poorer and poorer. This is reflected in high unemployment levels and high levels of indebtedness both public and private.

    A mechanism by which this stratification has ocured is wage international arbitrage. The exploitation of cheap foreign labor has enriched corporations and share holders at the expense of the wealth of the nation. Effectively true wealth has been exported. The obvious imbalances that were the outcome of excessive productivity export were ignored by policy makers and regulators and allowed to reach extreme levels. Symptoms such as excessive financial market liquidity leading to bubbles and collapse were treated but not their causes. One bubble was merely replaced with another and gross debt levels were allowed to continue to rise.

    At some point of course it must all come to an end. It would have been better if we could have learned more from the lessons of the past. But no each generation is doomed to relearn the lessons.

  50. pokeman says:

    Keynesianism will eventually be shown to destroy currencies. Next…

    Keynes was naive to believe that politicians could run surplus’ during booms.

    A little know fact is that the Bretton Woods conference, Keynes was against one country having the reserve currency, arguing that the reserve currency country would eventually run destabilizing trade deficits. My, look what happened!

  51. m111ark says:

    A few years back I read one of Wayne Dyer’s books, “There’s a Spiritual Solution to Every Problem.” It should be required reading for all economist, and everyone else. Of course, you sorta have to know where your going to discern the value of its messages.

    The casualty of our age is truth. Without the guidance of truth, we’re all left to depend on our own feeble brains. Hence, you get distortions aplenty. Keynes ideas were distorted to suit the politicians, well, half his ideas were. Mises and Hayek were dismissed because they offered too few avenues of easy escape. A truth seeking soul will have fewer temptations to misuse the notion of truth. The struggle to understand economy and markets offer more than just the chance to reap material rewards, we get to check where we are in the struggle to understand reality. We all have to grow up some more before we recognize that problems are natures way of reminding us that we’ve wandered off the path.

  52. Simon says:

    Pokemon

    If what you say is true then surly Keynes was not at all naive. You contradict yourself in adjacent sentences.
    Perhaps if we had had something like SDR’s in place as a nominal exchange or “reserve” currency things would be a lot less problematic right now.

  53. cheese says:

    “Spend against the wind”…………

    When hasn’t the wind blown?

    Every little contraction since when? The General Theory?…….Has been made out to be a hurricane.

  54. Sechel says:

    The effect of government stimulus is temporary and the taxpayer financed stimulus must be paid back. Keynes envisioned government surpluses in good times and deficits in bad times, which is not the situation we find ourselves in, and missing from any discussion is whether all stimulus is equal(i.e. does embarking on a new NASA program, rebuilding of the national energy grid, building a high speed train system have the same effect as leaving money on the front of the white house lawn). Our already huge prior deficit introduces a new dynamic Keynes did not have to deal with in WWII. And interestingly enough Keynes did not have children who would bear the future burden of debt repayment.

  55. philipat says:

    Incidentally, irrespective of economic theory, Keynes has always been a contraversial character. He was part of the “Bloomsbury Set” of mainly Cambridge educated intellectuals, including EM Forster and Virginia Woolf.

    (Bloomsbury is an area in Central London between The Aldwych (And LSE) and the British Museum to the East of Tottenham Court Road where the wealthy sponsor of the set resided).

    Keynes was quite openly Gay which, in the 1920′s was regarded as criminally insane.

    So, I wouldn’t imagine he is turning in his grave!!

  56. Julia Chestnut says:

    If I remember correctly from my economics and finance classes, and I quit at the MA level when I became disheartened with economics, Keynes is one of the few economic theorists to make a fortune in the markets. He made a fortune in triangular arbitrage – which, as we know, is not available as a means of enrichment anymore unless you are a lot faster than a computer.

    But I have always thought “Now THERE is a guy you can get behind when he tells you how the market operates.” I’m impressed by someone who can theorize about the market, but also sees its imperfections clearly enough to profit.

    I do like Keynes, I do believe that he was right as a theoretical matter. I know that tightening is never popular, and it takes politicians with real guts, along with a populace well-enough educated to know what is good for them, to accomplish his method. Unfortunately, we have neither – and we do have a whole bunch of monetarists and neoliberal Chicago School freaks wailing about the market righting itself and the evils of regulation and market steering. Hmmmmm. I’m not sure we’re a place where rational market action will work any more.

  57. Petey Wheatstraw says:

    Keeping economics and politics separate is impossible.

    That said, other than David Stockman, there is no economic philosopher who matters in the context of our current political/economic situation.

    His philosophy:

    First, one must accept, without question, that anyone favored by the lords of money creation is not subject to the human capacity for greed, and being free of such a common character flaw, will, of their own sense of selflessness, willingly redistribute their wealth to those who need it.

    Secondly, in good times, the government must go into debt, and give the borrowed money to the wealthy. In bad times, the government must increase the velocity of debt acquisition, and pay the wealthy to take the borrowed cash off its hands.

    What could possibly go wrong?

    No economic philosopher that ever lived anticipated the Black Swan that was David Stockman.

  58. scepticus says:

    People tend to forget that keynes put forward two key ideas aside from the idea of countercylical deficit spending. Firstly, at bretton woods he proposed that the bancor be used as the world reserve currency, because he understood that any nation providing the worlds reserve currency would have to run a huge deficit, and he saw that was ultimately not sustainable and would lead to the imbalances we now face.

    Secondly, as a parting shot in his general theory he suggested somewhat cryptically that the future had more to learn from [silvio] Gesell than from marx. To my mind this means he foresaw the ultimate failure of his countercyclical public spending prescription (whether through feckless politicans failing to save in the good times or whether due to the ultimate endnig of growth).

    In fact the ideas of gesell were incorporated to some extent in the bancor, in which chronic deficit and surplus nations would both be charged a fee that would increase gently the further their net balance with the world bank strayed from zero.

    Keynes was indeed a visionary, but we have yet to test (or even discuss properly) these two key ideas of his which as far as I can see offer the only long term way forward at this point.

  59. Niskyboy says:

    Does Keynes consider where the govt. gets the money it would use to stimulate? If not, then his ideas are at best incomplete.

  60. mark says:

    Liquidity trap! liquidity trap! liquidity trap! (I know. I like to repeat myself.)

    As Krugman points out ad nauseum, Keynes critics don’t or refuse to understand that Keynes prescription for gov’t to step in and create demand is only in the circumstance where administered interest rates have reached the zero bound and monetary policy has reached the limit of what it can do.

    Keynes has the only workable theory for what can be done under these circumstances to ameliorate the suffering. The other theories (see e.g., Hayek and Schumpeter) are in my view economic malpractice since they call for society to allow for whatever suffering is necessary to allow the market to fix itself. It is precisely this vein of thinking that Keynes referred to when he said:

    The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.

  61. Scott F says:

    I don’t know; I’m not an avid Keynesian, but The General Theory has some moments that are pretty enthralling simply from watching his mind at work. Books like Civilization and Its Discontents and Beyond Good and Evil are like that for me, where I certainly may not agree with everything within them, but they’re completely exhilarating to read, and the General Theory has those moments too.

  62. agresty says:

    The late and great Henry Hazlitt did a fantastic hatchet job of Keynes and government deficit spending in his 1946 classic “Economics in One Lesson”. For those with Keynesian wool over their eyes please click on http://www.hacer.org/pdf/Hazlitt00.pdf to see the light.

  63. BR,

    if you feel that way about JMK’s GET, then you’ll, more than, appreciate Mises’ “Human Action”..of which a .pdf, and other related resources, can be found below..

    http://mises.org/Books/humanaction.pdf

    http://mises.org/resources/3250

    http://mises.org/easier/easier.asp

  64. b_thunder says:

    Consider:
    -That public purse strings should be used counter-cyclically is a very Keynesian concept.
    Response: does this mean that Gov’t should aggressively pay down debt during the econ. expansion? If “doing nothing” can cause slower econ. growth and 12% unemployment for a few years, borrowing more every year will eventually cause the destruction of the country as we know it. Either follow Kaynes in both “good” and “bad” years, or don’t follow him at all.

    -Economists offering alternatives to Keynes claimed markets behave efficiently. Those ideas collapsed — along with everything else — in 2008.
    Response: every single one of them ? Really? Isn’t it a bit anecdotal?

    -With business and consumers refusing to spend, Keynesian theory says it’s up to the government to stimulate consumption — by spending more or by using tax cuts to stimulate demand.
    Well, yes. Or, let the prices fall so much that deals become too good to pass up. And if the prices fall fast, the adjustment period will not feel as painful.

  65. IS_LM says:

    A very nice discussion. You can see in the comments the standard strains of economic thought since the days of Say and Mill. (Say would ultimately refute his “law” by recognizing the role of money, which obliterates the exchange economy in which supply creates its own demand.)

    I would just add a small point. Much of what we think of as Keynesian aggregate demand policy is actually Keynes’ original writings refracted through John Hicks, who mathemetically specified the famous IS-LM framework in his paper, Mr. Keynes and the Classics. Indeed, the only reason the classical framework of market clearing has an coherence is because of Keynes. One needs truly to understand a theory before thoroughly debunking it, as Keynes’ General Theory does. Finally, I would note that Hyman Minsky’s principle of destabilizing stability is far more coherent than Shumpeter’s creative destruction. The Austrians are orgasmic when asset prices are rising–for whatever reason. When they come crashing down, their standard refrain is useless.

  66. curbyourrisk says:

    Now…what Keynes theories are we talkng about? The POLICALLY corrupted ones currently pushed by the Administration and certain so-called Economists along with many politcally charged bloggers, or what he really said and wrote about?

    Persoanlly, I will take Austrian economics over Keynes……any day of the week.

  67. countziggenpuss says:

    For all of the monetarists, austrians and others who just can’t seem to face reality, there’s a little known country called Japan that you might want to read about (http://www.frbsf.org/publications/economics/letter/2001/el2001-31.html)……. or you can read Paul Samuelson, who was somehow able to predict the current state of the economy when he wrote the below in 1948:

    “Today few economists regard Federal Reserve monetary policy as a panacea for controlling the business cycle. Purely monetary factors are considered to be as much symptoms as causes, albeit symptoms with aggravating effects that should not be completely neglected.

    By increasing the volume of their government securities and loans and by lowering Member Bank legal reserve requirements, the Reserve Banks can encourage an increase in the supply of money and bank deposits. They can encourage but, without taking drastic action, they cannot compel. For in the middle of a deep depression just when we want Reserve policy to be most effective, the Member Banks are likely to be timid about buying new investments or making loans. If the Reserve authorities buy government bonds in the open market and thereby swell bank reserves, the banks will not put these funds to work but will simply hold reserves. Result: no 5 for 1, “no nothing,” simply a substitution on the bank’s balance sheet of idle cash for old government bonds.
    __

    In terms of the quantity theory of money, we may say that the velocity of circulation of money does not remain constant. “You can lead a horse to water, but you can’t make him drink.” You can force money on the system in exchange for government bonds, its close money substitute; but you can’t make the money circulate against new goods and new jobs. You can get some interest rates down, but not all to the same degree. You can tempt businessmen with cheap rates of borrowing, but you can’t make them borrow and spend on new investment goods.”

    So if you are going to write things like “Note that the Fed’s gigantic QE gun in March of 2009 pretty much stopped the downward deflationary spiral.”, you might first want to know that QE happened over the course of a year, not one month, with the vast majority of the purchases happening after March 2009….. and that the dramatic expansion of the Fed’s balance sheet happened in the latter half of 2008, not via QE from 2009-2010 (http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm) and you might actually want to see what happened to the CPI, and more importantly core-CPI, since March 2009…… but sometimes reality can be inconvenient.

  68. DeDude says:

    Most of Keynes concepts and ideas are unassailable because they are statements of facts, not lofty theories. Government spending does increase GDP (look at the formula for GDP). People hired to make infrastructure do spend more than unemployed people, so there is a multiplier effect. So far nothing fact-based has been presented to challenge Keynesianism. The best people can do is to claim some theoretical “harm” from debt or reduced credit availability (as a result of public debt). But none of these detractors have ever tried to quantitate that theoretical harm against the harm of letting millions of people be non-productive for years (a productivity loss that will never be recovered). The latest real world example of how great it works is the current world wide economic crisis. We avoided a dump into a depression by spending 0.8 trillion against a projected > 2 trillion fall in aggregate demand. The Chinese powered their public spending stimulus to almost match the fall in aggregate demand and they avoided a recession completely. Unfortunately our political system is not competitive with theirs so we don’t appear able to design effective policies based on facts. Are we sure that their economy won’t overtake our until 2040 – probably will be earlier than that.

    The biggest problem with Keynes ideas is that few politicians (Clinton being the exception) can handle the second part of it – paying back the debt in good times. Politicians are to self serving and voters to stupid to demand an enforcement of that. We may need a balanced budget amendment to our constitution that basically freeze spending and increase taxes on a sliding scale when growth exceeds a certain level and deficits (or debt) exceed a certain % of GDP.

  69. DrO says:

    In an industrial economy (we used to be one):
    Government Stimulus leads to Consumption
    Consumption leads to (Domestic) Production
    Production leads to (Domestic) Jobs
    Jobs leads to Income
    Income leads to Taxes Paid and Savings
    Taxes paid and savings leads to Treasury Surplus and Wealth creation.

    In a post industrial society (we are one):
    Government Stimulus leads to Consumption
    Consumption leads to imports (Foreign Production)
    Imports leads to trade deficit
    Trade deficit leads to debt
    Debt leads to bankruptcy
    Bankruptcy leads to poverty.

    Isn’t globalization great!

  70. Freestate says:

    It seems fascinating that economics is having the same debates that it had more than 70 years ago. Is there any discipline that has made less progress than macroeconomics during this 70 year period? And is progress so slow because the subject is so difficult or perhaps the cycle time between economic calamity is so long or perhaps the topic is so entwined with political belief?

    The two rivals for the claim of the greatest economist would seem to be Keynes and Irving Fisher. And they both agreed with the idea that the economy does not aut0matically have to return to general equilibrium. This was the major break from classical economics. Both recognized that the economy can get stuck in a state of extended sub-par performance and disequilibrium. And this is exactly where we are today.

    You could argue that Fisher, followed by Hyman Minsky, have had their debt deflation theory validated by the current crisis. Central bankers ignored debt deflation theory and we have paid the price. And now we come to a period where we get to test the solution. Of course, the real solution is to not allow debt to explode in the first place and to eliminate the possibility of asset bubbles.

    But now that the crisis is here it seems that we are testing the Keynesian solution and the Fisher solution. Keynes would advocate government intervention to issue debt to replace falling private debt and thereby stimulate aggregate demand. Fisher argued for reflating asset values and stabilizing prices. It is interesting to see that the Fed is undertaking both courses of action.

    The argument against Keynes as the single greatest economist is simply that Fisher’s debt deflation theory is more powerful in describing the major financial crises that all seem to be debt driven. But Keynes was perhaps more broadly insightful and influential in his prescriptive measures for an economy far from equilibrium.

    So it in my book I think we have tie.

  71. scepticus says:

    What neither Keynes nor Fisher address explicitly is what happens when future real growth prospects make both the future retirement of countercyclical public debt run-up impossible and the inflation of asset prices impossible.

    For example, here is a fed paper written in 2005 that predicted a 60% fall in US house prices beginning in 2011 and moving through to 2038, purely as a result of demographics (population age structure mostly).

    http://www.housepricecrash.co.uk/forum/index.php?showtopic=150769

    No amount of keynesian or fishereque (or lassyfare for that matter) medicine is going to reverse a trend which is based on those most fundamental of economic variables – the number of people and the distribution of their ages.

    The correct economic policy to pursue when faced with an imminent end to growth or at least a multi-decade secular contraction is something these masters declined, to my knowledge, to work into their theories.

  72. BigD173 says:

    If we accept the truism that politicians care ony about the next election, it’s little wonder that Keynes is the most influential economist of our time. Suffering from a weak economy? No problem, just inject a massive amount of stimulus via deficit spending. That will indeed provide some benefit in the short run, although it will also increase our debt burden and pass the cost of our extravagance along to future generations, who must eventually pay for our overspending.

    But Keynes was not overly concerned about the long run: “The long run is a misleading guide to current affairs. In the long run we are all dead.”

    An economist focused on “current affairs,” with little or no respect for the ‘long run,” is easily embraced by politicians who face election contests every couple of years. Yes, Keynes is indeed the most influential economist of our time.

  73. DeDude says:

    “Higgs noted just yesterday that in spite of low rates in the corporate bond market, business investment is deeply depressed — to some extent because the legal and tax regime is so uncertain”

    If Higgs think that legal and tax uncertainty plays any substantial role in the lack of business investments then he is an idiot. The one and only thing that will get businesses to invest, is if they lack the capacity to serve their costumers (or can predict that they soon will). The only reason businesses are hoarding cash rather than investing it is that there are no new customers (private or public). No legal/tax “certainty” will get them to invest until they can use their current capacity and see growth in consumption.

  74. IS_LM says:

    @Freestate

    Macroeconomics went down a blind alley in about 1982 with the wholesale adoption of micro-based rational expectations general equilibrium models. Despite the last three years, the GE advocates have doubled down by placing all of the workhorse models on the web . One avenue that might lead them out of the dark ages is a form of learning-by-doing. George Evans is one of the leading scholars in that area.

    As for Fisher, at least Keynes didn’t go broke in the Depression ;)

  75. lalaland says:

    I’m sure BR gave up way before this comment was written, but I’ll throw it out there anyway:

    There were 2 people who came close to putting Keynes’ ideas into action: Bloomberg (as mayor) and Clinton.

    Bloomberg built up a 5 (?) billion dollar rainy day fund for NYC by keeping taxes too high when the real estate market was filling the coffers with transaction fees, and so far he’s barely had to cut anything despite the lousy economy.

    Clinton didn’t mean to overshoot of course, and with the decline of the economy after the .com bubble burst and 9/11 kicked in it might not have helped all that much but it might have; you never know. If Clinton had another 4 years to burn, with a Republican congress (who at that time was committed to reducing spending) it might have played out exactly the way Keynes prescribed, and we could have avoided the pressures that made Greenspan open the spigot, and rainbows and happy days would have followed, rather than the grim misery we wallow in now.

    Ot whatever. Anyway, my reading is in modern thinking/consciousness/economic thought there are only 2 options anyway: Keynes vs. Mellon, since anything other than a version of Keynes seems to be a version of “liquidate them all”.

    Could these bubble things disappear if we had a national savings rate of 20%?

  76. JimRino says:

    The FED is not the only one to create inflation.
    Wall Street did it through fraud, leverage ( 40x ), and the CDO market.

    Keynes is relavant during a downturn like this.
    I don’t expect we will be doing Keynesian economics in 3 years. Hopefully, we can be adult and raise taxes to pay off the debt. But, to put a floor under the Wall Street Depression we needed Keynes. Already people are out of work thru no fault of their own. Allowing Wall Street to write it’s own rules of destruction was clearly the problem. Who didn’t see a bank writing a mortgage, taking a fee, and passing off the risk to a third party, would be a problem?!? How did Zero-Doc, Interest Only mortgages become an option?

    As for Freedman: 7 Disasters in 7 Countries puts a lid on his economic philosophy: The Shock Doctrine.

    Interesting Germany is spending MORE on Stimulus then the US. No one is following the Austrian “philosophy”, of make Disasters Bigger so the Rich get more Bargains.

  77. scepticus says:

    “Could these bubble things disappear if we had a national savings rate of 20%?”

    lala it is possible to have a bubble in money too – its called deflation. As unsustainable as any other bubble.

    a savings rate of 20% would certainly result in a money bubble unless you could find some unsuspecting developing economy debtors to dump it on.

    thats what austrian economics advocates – stop bubbles in assets occurring by having a perpetual bubble in money. Of course the inconsistency of this position is entirely lost on them.

  78. sparrowsfall says:

    Just to say, regarding our current situation:

    It results from a 30-year binge of nonstop, out-of-control Keynesian stimulus (with a brief hiatus under Clinton), all driven by The Reaganomics Strategy:

    Borrow money from our children and from abroad to buy votes here, using the world’s oldest political pander: “I’ll cut your taxes.”

    Reagan came out smelling vaguely like roses because Volcker was able to open the spigot. He was able to do that because debt/GDP had been declining steadily since WWII — all under Democratic administrations or Republican administrations that today would be considered socialist by righties (Eisenhower, Nixon/Ford).

    Things aren’t so rosy for Bernanke/Obama. Debt/gdp has been rising precipitously since…you guessed it…1981.

    The spigot’s been wide open for thirty years.

  79. AHodge says:

    Keynes is the man
    not only on spending, but banking and many other areas. As much as someone around most of a century ago can be, though not without flaws
    the neoclassical other side is mostly wrong, but not completely. I hate it when they label everyone not in their church keynesian. because there are 10,000 versions who might qualify and most of them have something wrong. now planet “R” has taken this up.
    while the neoclaks ideas, like spending wont work, quantitative ease wont work, were spectacularly wrong recently, they have a point.
    these two are starting to get exhausted.
    Those of us who have run big models for a livin know the very GDP is added up from “Keynesian” demand components. Consumption, investment, govt and trade. Try to have an outlook without reference to that? these tools are essential.

    But the profession, especially academics, is a mess. having been hijacked by neoclaks of which our friend clawback above is exhibit one. we have five nobel prize winners with nearly useless “real cycle” theories. Like most of the problems are workers not taking pay cuts fast enough. brought to you by clawback above, Yes ths is what your sons and daughters are paying for in college. I ask many. B talkingto some at GW tonite.
    do they have any idea what just happened? and they will say i didnt learn a f…ing thing. You can read Bob Barbera’s the cost of capitalism for a proper skewering of the predominant academic “schools” and nobel prize winners

    fortunately many of the more talented practical economists who saw some ot this coming are bettr recognised and are more listened to now
    my elder statesmen are larry klein paul volcker and george soros
    good academics are rogoff, furguson, calomaris, its hard to find banking experts there.
    good wall st guys like hatzius Berner all use a demand model and do their homework, Krugman and feldstein are worthlistening two from the left and right. my old friends Kotok and ellen zentner are always helpful and i got good warnings in 2007 from many of my old global insight buddies
    and get yourself a couple permabears like the incomparable roubini and rosenberg

    but forecasting aint a science. these guys are all disputing something, even if they have the tools in the shed.

  80. Renn says:

    “That public purse strings should be used counter-cyclically is a very Keynesian concept.”

    What about corruption? If the public purse is used to eliminate competition by favoring entrenched power or by protecting favored actors from the consequences of their own failed investments, than neither the free market nor the voters have the power to dislodge fundamental failures from our system. Keynes does not require the public purse to be opened for the rich but it does seem as though the rich have received most of the benefits recently.

    The strength of Democracy is its ability to choose public good over entrenched power. I suggest that even well meaning corruption like the decision of the Supreme Court to allow the Judicial Branch to determine the outcome of the 2000 election rather than the Congressional branch is an example of the instincts of power to promote “stability” over fairness . Fairness is the opposite of corruption.

    No matter how stupid or counter-productive the Tea Party seems, they are, at least, focused on the corrosive effect corruption has on freedom. It is ironic that the Koch bros., among most entrenched power in the country, bank-rolled the tea party initially. Oh well, no system works optimally at all times.

  81. jessica says:

    Since roughly 1970, the most dynamic parts of the economy have been about knowledge production. All our economic/social rules are for material production. Ramming that square peg into a round hole is the underlying cause of many problems that look separate.

  82. lalaland says:

    I nominate Jessica to replace Bernanke….

  83. soloduff says:

    BR’s noble request to separate economics from politics notwithstanding, Keynes’ principal significance is in providing another rationale (“government ordering of investment and employment”) for the bourgeois reformist claim that wise government can save capitalism from itself; hence society can have its capitalist cake and eat it too (with reforms). All that is needed is to put the “right” folks in power (such as Keynes conceived himself, and E. Warren conceives herself, and S. Johnson conceives himself , . . . Krugman . . . Stiglitz, and so on). If you like capitalism, reformism is a tried and true way to deflect discontent. Keynes himself shared this illusion, epitomized in his doctrine of “euthanasia of the rentier”: Save capitalism by making it so productive that profits, hence capitalist evils . . . disappear. “If I am right,” said Keynes on p. 221 of the General Theory, “in supposing it to be comparatively easy to make capital-goods so abundant that the marginal efficiency [profit rate] of capital is zero, this may be the most sensible way of gradually getting rid of the most objectionable features of capitalism. For a little reflection will show what enormous social changes would result from a gradual disappearance of a rate of return on accumulated wealth.” This is like saying you can keep cancer without having uncontrolled cell growth! In other words, Keynes was profoundly ignorant of the nature of the beast that he wanted to save. In the real world, this plays out in the obvious empirical pattern of political Keynesianism; which always “somehow” manages to genuflect before the summum bonum of capitalism, namely, accumulation ad infinitum. Thus real-world Keynesianism is epitomized in the Permanent War Economy, devoted to controlling the world for the sake of endless profit-grabbing. This warps humanity, destroys nature, and leads to endless wars. If this is “success,” then you (and Keynes) can keep it . . . in the Rat Race, only the rats win.

  84. gbgasser says:

    I think Keynes’ best contributions were how he modeled the economy, understood money and pointed to the inadequacy of microeconomic thinking as a way to understand and prescribe for aggregate downturns.

    He understood the economy as circuitous. That all income was a result of spending, that investment led to savings.

    He understood how gold standards hampered a monetary authority.

    He understood that any efforts towards aggregate saving would result in incomes falling and thwarted abilities to save, a classic fallacy of composition.

    He completely eviscerated arguments that looked at labor as a commodity that when over priced would lead to less use of it by pointing to the other side of the “labor price” coin which is the “personal income” side. How on earth could a policy which puts less income in peoples hands have any chance of reversing a deflationary spiral?

    Mostly he understood the true unusual nature of severe recessions and that these unusual things had some very counterintuitive remedies.

  85. Charles says:

    This has been a fantastic and illuminating discussion. That said, I can’t believe no one has posted a link to this yet:

    http://www.youtube.com/watch?v=d0nERTFo-Sk

  86. BigD173 says:

    @ Charles

    That is an awesome video — thanks!

  87. JustinTheSkeptic says:

    Where the flaw is, is in the ability to become mega wealthy today. Even they feel some guilt – get a load of Gates, Buffet, etc. Of course let’s face it being in the most economically educated class for the past five hundered years doesn’t hurt either – they don’t call Jewels, Jew -els for nothing, do they? (hard to believe if it relates to someting else…but I’m open.) Anyhow, the point is the system has gotten to the point that singalrity men (people) can control vast quantities of wealth and influence. Why not ask them what the problem is? I know that I wish I had that prospective – and I mean that truly from the “some how in the long run we have to figure out how to get off this planet, sense. Love, Justin

  88. JustinTheSkeptic says:

    As far as Keynes – All is good until you take rates to Zero (for an ultra-prolong period), and wait until the Dark Side of the Moon Thaws??????????????????

  89. subscriptionblocker says:

    BR: My nominee for least insightful comment of the day. A tragic waste of good electrons.

    Perhaps….Maybe not….

    Where was the placebo group when Keyne’s ideas were tested? Is it within the possibilities that Keynes ideas are no better/worse than Laffers? Or Freidman’s?

    A lot of things we believe today will be considered odd in 200 yrs. They will not survive the test of time.

    Well meaning people are right now busily spending money in hopes of changing our juju. Is it not possible we (the patient) are better served if they simply kept their hands clean and let us sleep for awhile? Especially since that placebo test for their “cure” never really happened?

    If Keynes ideas fail to secure rigorous statistical proof – other ideas will be under discussion 200yrs from now. Historians will regard Keynes simply as a popular delusion of this era.

    Both Republicans (when they are in power) and Democrats are Keynesians.