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So Keynes, after all? - Impressions and Expressions of Ijon
January 4th, 2009
03:41 pm

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So Keynes, after all?
So Krugman says Keynes was right and what the US (and therefore, to some degree, the world) economy needs is increased government spending, with an emphasis on material goods (e.g. public works) over financial assets. Bruce Bartlett of Forbes agrees, and stresses even more acutely the importance of the spending to avoid merely exchanging one security for another with no net effect.

So, is this part of the Obama plan? Skimming the (rather-marketoid-sounding) statements in Obama's "Economy Agenda", I'm not sure the advice offered by Krugman and Bartlett is a major part of the plan. Can any of you shed some light on this?

Also, wasn't "Keynesianism" disparaged in recent decades? Is this a semi-consensual "comeback"?

Update: Oh, hmm, Wikipedia suggests that both answers would be "yes".

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From:ukelele
Date:January 4th, 2009 11:05 am (UTC)
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marginalrevolution.com is the source of most of the economics I know (and Tyler Cowen one of my intellectual crushes); it's sufficiently anti-Keynesian that I was surprised myself to find those ideas hadn't been thoroughly discredited, but Krugman is sexy these days, and Keynes I think never lost his cachet on the left (and among non-economists in particular, though of course you can't count Krugman that way), whereas prominent economics commentators tend to be more center-right.
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From:shunra
Date:January 4th, 2009 02:19 pm (UTC)
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Keynesianism was indeed disparaged. But by whom? By people who claimed that any government involvement in the market, to any extent, was bad (which seemed to mean, it got in their way when they wanted to make money) and that the invisible hand of the free market would be the ultimate solution for everything.

That is a worldview characterized by irrational optimism: "I don't want any rules because maybe I'll get REALLY RICH someday, and if I do, I don't want any of my money to be taken and used, ever, for any purpose, mine, mine mine mine mine". Like buying a lottery ticket, holding that point of view stakes out a whole future of maybe-someday wishes at a very low cost. It is cynically abused by people who have already gained large fortunes (thanks to the system as it currently stands) and want to minimize their taxes.

As to Obama's plan - rumors are that he'll spend a trillion dollars on various public works projects, destined for the infrastructure of both the roads and education. Looking around my home region, this would seem quite necessary (the Hood Canal bridge will be shut down for six weeks in June, disconnecting the Olympic Peninsula from the Seattle region; the schools in town asked for a 50 million dollar construction levy to improve crumbling school buildings - and failed to get it (failed appropriately, but that's another story). Since much of the construction in the U.S. has come in government-subsidized waves, crumbling happens on a similar schedule all around.)
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From:Daniel [oeconomist.com]
Date:January 4th, 2009 06:37 pm (UTC)
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By people who claimed that any government involvement in the market, to any extent, was bad (which seemed to mean, it got in their way when they wanted to make money) and that the invisible hand of the free market would be the ultimate solution for everything.
No. First, there are almost zero people who believe that that the invisible hand of the market would be the solution for everything. Second, those people who believe that state intervention in the market is always unhelpful (not the same as believing that all problems are solved by a market) were never even the majority amongst the critics of Keynesianism.
That is a worldview characterized by irrational optimism: I don't want any rules because maybe I'll get REALLY RICH someday, and if I do, I don't want any of my money to be taken and used, ever, for any purpose, mine, mine mine mine mine
You're generating offensive theory with reckless disregard for the truth. Really, you've done no better here than those who claim that everyone who does believe in state intervention wants to be a parasite.
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From:shunra
Date:January 4th, 2009 06:48 pm (UTC)
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Unfortunately for us, the "almost zero" people who believe that were in charge of the U.S. economy.

The critique of Keynesianism is really not the issue, as far as I can see. The issue is the practices of governments, which were advised by (tfui) Friedman acolytes.

I would welcome a better explanation than "irrational optimism" for the support of reduced taxes and lack of government "interference" amongst the white part of the underclass in the U.S. - you know them, they're living in trailer parks and embracing their guns and beer. Krguman's theory was that it was racial backlash (they'd prefer to live in poverty than have tax money redistributed to anyone black). Mine supposes positive, rather than negative motivation.
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From:Daniel [oeconomist.com]
Date:January 4th, 2009 08:16 pm (UTC)
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Unfortunately for us, the almost zero people who believe that were in charge of the U.S. economy.
Once again, you are proceeding with a reckless disregard for the truth, in this case a highly observable truth. The size of the state grew dramatically during the period of Keynesian eclipse. The state spends more, borrows more, taxes more (the fact that it doesn't tax as much as some people would like doesn't change that), and regulates more.

I'd be willing to bet that when some politician advocates a policy that you rather like, but practices something very different, you are quick to note the difference, and inclined to correct those who claim that the failure of the practiced policy is a failure of the preached policy. In any case, you ought to note such distinctions all around, even when you don't like the preached policy.

What the Republicans did, in power, was to do one of the things that they had claimed (with some justice) the Democrats had done: use the state as a active vehicle for personal enrichment. Instead of laissez faire, they've practiced corporate kleptocracy. And the bail-out, though being rationalized on a Keynesian basis, is really a continuation of that kleptocracy by other means.

As to why people support any given policy, whether it's a rejection or an embrace of redistribution, that varies across people. (I've certainly encountered plenty of social democrats whose support for redistribution is based upon presumptions that are racist.)

Most of the that part of the white under-class living in trailer parks, embracing guns and beer, and voting for the Republican Party don't believe or support the claim that that the invisible hand of the free market would be the ultimate solution for everything, and (more importantly, most of those who do truly believe and support such a claim don't live in trailer parks; so switching the discussion to them is a bit of verbal sleight-of-hand. Since I don't hang much with trailer-park people, and don't know any who embrace hard-core support for laissez faire, I won 't speculate about their underlying motivations.

What really seems to drive most classical liberal extremists is simply consistent individualism.
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From:shunra
Date:January 4th, 2009 08:23 pm (UTC)
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Thanks, I'll use "Once again, you are proceeding with a reckless disregard for the truth," as an example of "how to lose your audience in less than 20 words".

It will be quite useful for that "how to blog and online interaction" class I'm giving.

Such a pity you didn't want to talk.
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From:Daniel [oeconomist.com]
Date:January 4th, 2009 09:40 pm (UTC)
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Ah, you confuse my audience in general with yourself.

I'm quite willing to talk, but not at the cost of abiding by your misrepresentations. And I'm really addressing myself to others when I baldly point-out what you're doing.

I trust the judgment of that audience as to why you withdraw.
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From:ayun
Date:January 4th, 2009 03:20 pm (UTC)
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Oh, it absolutely is - the two big pieces of it are investment in sustainable energy R&D and a flood of money toward infrastructure maintenance and upgrades.
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From:ijon
Date:January 4th, 2009 03:33 pm (UTC)
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Thanks!
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From:Daniel [oeconomist.com]
Date:January 4th, 2009 07:33 pm (UTC)

Amongst Economists

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Part of the explanation here is that what is meant by Keynesian has varied amongst economists; and that, in particular, what is meant by those who self-identify as Keynesian now is typically very different from what was meant by those who did so, say. 40 years ago.

The mainstream within Keynesian theory used to be a body of theory based upon the interpretation of Keynes given by Sir John Richard Hicks, in an essay entitled Mr. Keynes and the Classics. (Interestingly enough, Hicks was not endorsing what he took to be Keynes's theory; he was just trying to grasp and convey what Keynes meant.) And this mainstream held not only that booms and busts were natural to a market, but that the state could quite eliminate the busts by an increase in spending during them, and should fund that spending by borrowing during busts, and then taxing (to pay off the borrowing) in good times. Taxing in the good times would moderate the booms, but this was seen either as salutary or at least an acceptable cost.

That sort of Keynesianism fell out of favor for a variety of reasons. Other schools of thought (including some which insisted that they represented a truer interpretation of Keynes) found various implausibilities and errors in the body of theory. Milton Friedman's sort of Monetarism seemed to have a better predictive track record. The Keynesian mainstream said increasingly implausible and repugnant things in its attempt to explain the stagflation of the '70s. A decades-long black-out of the Austrian School was disrupted by the Bank of Sweden giving its Nobel Prize to Friedrich August von Hayek (and, later, various other economists with strong associations with the Austrian School). The rational expectations school emerged (largely from amongst Keynesians), with the argument that a policy couldn't work in the long run if its working wasn't compatible with its being understood by the typical participant in the economy. (The mainstream of Keynesianism had involved policy prescriptions that required that most of the people being fooled most of the time.)

However, Friedman's monetarism has, as a practical matter, foundered because, in recent decades, the data that it needs has become unavailable. (Specifically, the evolution of the financial system has made it impossible to really track the money supply.) The body of theory of the Austrian School has been too alien for most economists in the more general mainstream to grasp its central insights, and all but perhaps one of its major exponents are dead (with that one survivor fairly old and quiescent). Meanwhile, the mainstream of Keynesianism has evolved, adopting some of the insight of the rational expectations school and otherwise reforming itself into something more plausible.

None-the-less, one thing to understand here is that the renaissance of Keynesianism amongst boffins and wonks is far more pronounced than that amongst economists.
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From:ijon
Date:January 13th, 2009 05:42 am (UTC)

Re: Amongst Economists

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Thanks, that shed a lot of light!
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From:Daniel [oeconomist.com]
Date:January 4th, 2009 09:42 pm (UTC)

Amongst the Politicians

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One should note the difference amongst what the mainstream of economists have said, what the politicians have preached, and what the politicians have practiced; there is rarely, if ever, agreement amongst these three, and I'm not sure that one even sees agreement of any two of the three.

Long before Nixon famously said We're all Keynesians now[1], there was discernible erosion of what consensus for Keynesianism had existed amongst economists. Friedman's Monetarism was discernibly gaining respect amongst economists, even though it was being treated as a weird fringe theory by the Keynesians (who made a practice of dismissing alternatives in such unscientific, unscholarly manner) and by the mainstream media. And, when Nixon effected wage and price controls, he told the nation that he was doing so to protect the free market.

Meanwhile, while the state had been willing to spend in excess of revenues in bad times, it had been reluctant to spend below or even at the level of revenues in good times. Indeed, during the Kennedy Administration, the idea was introduced that otherwise unobtainable levels of growth could be sustained by perpetually running deficits. It is extremely doubtful that Keynes would have come around to this point-of-view; in any case, it markèdly contrary to what he'd advocated.

Doubts and objections amongst economists surely played a rôle in the eclipse of Keynesian policy, but what really changed things was the stagflation of the '70s. The economy went into recession, even as prices had risen to annualized rates approaching 20%. Talk of a major depression was very much in-the-air; the politicians, boffins, and wonks generally retreated from Keynesian policy.

It became briefly fashionable for politicians to speak more of the virtues of a free market and less of the virtues of a mixed economy; but, in actuality, what was being pursued was more sustainable growth of state power. For example, the whole Laffer-curve argument for cutting taxes was that total tax revenues would grow if rates were cut. And this prediction proved correct, but spending went up at a rate that outpaced the additional revenues, which illustrates that the state was not being rolled-back over-all. After this period of reform, when the politicians and wonks decided that they'd basically achieved a sustainable order, their talk of the free market became again mixed with that of a kinder, gentler America, of the Third Way of Clinton, and of compassionate conservativism.

Anyway, the order that was established an evolved during the eclipse of Keynesianism proves to be unsustainable. One conclusion that might be drawn is that we really ought to have laissez faire. But that's a non-starter amongst most politicians and wonks; they sustain themselves, materially and psychologically, as agents of the state. So they're doing what the politicians and wonks of '29 and of the '30s did, calling for different of state programmes and for more state programmes.



[1] Nixon was actually quoting Friedman. But, Friedman had meant things less literally; he was acknowledging that theories such as his own bore more resemblance in their analytical foundations to those of Keynes (or, at least, to those of his ostensible followers) than, say, to those of v. Hayek.
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From:Daniel [oeconomist.com]
Date:January 5th, 2009 02:27 am (UTC)
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BTW, I strongly recommend that one read Keynes's A Treatise on Probability if one is interested in the foundations of probability or if one wants to puzzle-out What Keynes Really Meant in The General Theory. (It will come as little surprise that I don't have a high regard for The General Theory, but I think that A Treatise on Probability is grossly under-appreciated.)
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From:guygrobler
Date:January 5th, 2009 08:41 pm (UTC)
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no one was really right and no one really wrong. as always - the answer is in the middle ground.

I dont think extra government spending will help, especially when its based on taking out more loans or raising taxes - after all, the crises was created because of debt - so why take more debt? even if you intend to invest it all??? government is an inefficiant body. period. and government spending is never as efficiant as private market spending.

I think whats needed (and Obama is also planning that) is:

Tax cut and affording that tax cut by cutting on down on budgets. YES it will hurt various agencies but with the existing economic situation it has to be done.

Where to cut tax?
- cut tax on those who are most likely to spend the extra cash on hand post cut tax - the poor, pensioners, students (thus the money flows back into the economy)
- cut tax on companys that really need it (companys that want to expand) OR give them easier access to bank loans


Have you read Tim Harford? (The undercover economist)






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From:ukelele
Date:January 6th, 2009 01:09 am (UTC)
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"The crisis was created because of debt" seems to me a gross oversimplification, and I'm not convinced it has bearing on whether the government ought to be borrowing here. (I do think it has overborrowed, but the government debt issues and the financial-crisis debt issues are not the same.)

Harford's good stuff, though. Doesn't add much if you've already read, e.g., Freakonomics, Economics in One Lesson, and marginalrevolution, but puts it in a pleasantly digestible format.
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From:guygrobler
Date:January 6th, 2009 02:02 pm (UTC)
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Debt (backed up by a banking system with a far to loose regulation and a spend and go into debt attitude) was the first piece of the domino to fall and bring on the crises. The market for sub prime collapsed... and banks had to start write offs of bad debt they weren't gonna get.

This eventully lead to loss of trust and less credit fluidity which got the whole system stuck - when banks aren't loaning to each other it puts the entire market in trouble. All the intrest rate cuts, various interventions and giving financial backing came as a result of the bank sector loan halt - it was all done to bring back trust and get the system working again and get banks loaning again. I know this is also very simplistic. Obama's economic challange will be to fix all that and fix the regulation so it doesn't happen again

But look at the bright side, the fact that banks weren't giving out loans as easy as they were before managed to expose and bring down (albeit at a high cost) one of the biggest financial crooks in human history (medoff) and only because he couldn't get new loans to pay his interest on his previous loans
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From:ukelele
Date:January 6th, 2009 03:05 pm (UTC)
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Yes, I know all this (not least because I have recently refinanced and because a number of friends have faced layoffs as their companies have been abruptly unable to get loans) but I don't think debt is the right way to look at it. "The quantification and conceptualization of risk surrounding debt", perhaps; "the creation and use, without understanding, of new debt-related instruments"; "liquidity" if you must select a single word; but not debt per se.
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